1031 Exchange to 3 DSTs - How to Calculate and Convert Exchange Basis, Retire Relinquished Property, and Setup Replacement Properties

[DianeW777]

It seems the issue may be that although there is only 90,000 remaining balance of cost basis before the trade you may be using that actual number for the new asset, which would not provide the results you need.  It's important to emphasize that all components of the original building must retain in tact. Purchase price and land at full value and original date acquired, even if split between two properties.

It should be the original basis divided by the two properties and then the accumulated depreciation listed.  The asset you enter for the two buildings should be the exact same as the original entry if you add them together.  I copied your information below.  Although we are dealing with a balance of $90,000 you must prorate each figure to arrive at the correct depreciation (purchase price, land, date acquired).  Are you using the proration against the original figures or only the $90,000 which will never work out.

As we discussed the change in recovery periods for one of the buildings requires manual tracking to eliminate excess depreciation.

You must split the $310,000, the land of $62000 to enter your original asset for each of the buildings received in the trade, with the percentages you arrived at.

Relinquished Property

• 2/20/2004 = Purchase Date
• $310,000 = Purchase Price
• $248,000 Improvement / $62,000 Land
• 1/31/2022 = Sold Date
• 790,000 = Sold Price
• $125,000 = Outstanding Mortgage/Loan
• $90,000 = Calculated Exchanged Basis (Depreciation = $158,000)

You're doing well in trying to understand all of this, however you might consider using a tax professional to prepare your return for this year.  Hopefully this information 

[jamie-m-todd]

@DianeW777 

Good evening Diane, 

Once again, thank you for your input and your patience!

I do have a few more questions/ confirmations (in terms of going in the right direction):

1. It seems odd to me why the Original Basis ($90,000) identified in the Sale of Business Property section is not used when populating the Cost field in the asset depreciation section for the respective replacement properties.  I've seen several references by the TurboTax Community to do so, and in some cases people seem to combine the Original Basis with any Additional Basis to have 1 asset depreciation entry versus 2.
2. However, I went ahead and apportioned the original Sales Price ($310,000), Asset Value ($248,000) and Land Value ($62,000) between the 3 replacement properties - using the same apportion % calculated for that property across the Sales Price, Asset Value, and Land Value.  For example, in the case of the Senior Living Center, when I took its FMV and divided it by the total FMV across all 3 replacement properties, it came to about 18%.  This translated into the following:
   1. 18% * Sales Price $310,000 = $55,800; populated in the Cost field of the Original Basis entry under Asset Depreciation.
   2. 18% * Land Value $62,000 = $11,160; populated in the Land field in the same section.
      1. Please note, to try to simplify things, in using the 18% to drive the land value, I did not factor in what percentage the land value really is as a percentage of the FMV of the Senior Living Center.  I honestly don't even know what that calculation would look like.
   3. With these 2 values, TurboTax would have calculated the apportioned Asset Value as $44,640, which is 18% of the original Asset Value of $248,000
   4. TurboTax then calculated the Prior Depreciation as about $28,000, which is within a couple $100 dollars of 18% of the original properties Prior Deprecation (18% * $158,000 = $28,440).  So it seems like TurboTax is now calculating this value correctly.  Do you agree?
3. Now comes to the Ford Distr Center, I did the same exercise as above but consistently using 54% (as its apportion percentage) to drive the various values.
   1. 54% * Sales Price $310,000 = $167,400
   2. 54% * Land Value $62,000 = $33,480
   3. TurboTax would have calculated the apportioned Asset Value as $133,920.
   4. Now comes the discrepancy, probably dealing with the 39 year depreciation schedule.  TurboTax calculated the Prior Depreciation as about $60,000.  However, in using the same 54% against the original Prior Depreciation of $158,000 I am calculating about $86,000.  Is this where you are advising that I override the $60,000 value with the $86,000 value to prevent excess depreciation?  Please confirm.
4. In respect to the Oil and Gas property, which is using depletion for mineral rights versus asset depreciation, its apportion percentage is about 28%.  Even though I am not doing any type of asset depreciation in TurboTax, I still need to preserve the following (outside of TurboTax):
   1. 28% * Sales Price $310,000 = $86,800
   2. Land Value = Seeing this property doesn't have land (only minerals), do I have to pass on the $17,360 (28% * 62,000) to the other 2 properties?  If yes, how would I divide that out?  And by doing so, it will cause each property's remaining original basis to drop, right?  But maybe that is the right thing to happen?
   3. 28% * Asset Value $248,000 = $69,440.
   4. No further actions are necessary, as the Asset Value cannot be depreciated for the Oil and Gas property.  However, I need to save this value and use it when the property is sold.

I know I typed a mouthful, but any insight/confirmation you can provide will be so appreciated.  I so greatly appreciate your patience!

Thanks so much!

Jamie

[jamie-m-todd]

@DianeW777 

Hello Diane,

I just wanted to touch base with you to see if you had a chance to review my previous message?  I've learned so much from you so far, and I feel I am very close to correctly completing the 1031 Exchange setup in TurboTax.  My hope is that you will find the patience to work with me to put the finishing touches on my 2022 tax filing.

FYI - About 2 weeks ago I did reach out to a couple of Live TurboTax experts.  However, due to the nature of my request being specific to a 1031 Exchange, and a complex one at that, they were not able to provide the guidance that I needed.

I'd be so appreciative to get closure on the 1031 Exchange with you, as I feel it is right around the corner.

Kind regards,

Jamie

[jamie-m-todd]

@AmyC

Hi Amy,

I have been working with DianeW777 on setting up my 1031 Exchange correctly in TurboTax.  She has been a tremendous help, and I think I'm getting really close to finalizing my tax return.  I just have a couple more questions and I think I'll be done. 

I tried reaching out to Diane a couple of days ago, however, no response as of yet.  I'm not sure if she is out-of-pocket, or had to shift her attention elsewhere.   If you have a minute, I'd greatly appreciate it if you could look at my comments a couple of messages earlier in this thread to see if you can confirm my thoughts.  I'm trying to finalize the Cost, Land, and Depreciation numbers for the 3 replacement properties.  I've seen you answer other complex 1031 Exchange questions, so I thought I'd reach out and get your thoughts.

I've also copied Diane just in case.

@DianeW777 

Kind regards,

Jamie

[AmyC]

This has been a lot to read through! I say start with the IRS 1031 information. You know your exchange basis of the property sold and divide it among the 3 replacement properties. 

1. The new property will always begin a fresh depreciation schedule based on its lifetime, commercial or rental. How the basis is calculated depends on which option you are using. The IRS gives you two options for handling the exchanged property. 

• You can enter 2 depreciation schedules, one continues to depreciate the original property while the second handles the new property However, TurboTax does not handle the two schedule system.
• The other option is to use the single schedule. You use the new adjusted cost basis which includes the old property and start depreciation with the purchase. The original property's depreciation is subtracted from the basis of the new property.

2. Because we are limited to the single schedule option, the math is much easier to me.

For example- just making up numbers here:

• Buy building A, original cost $250,000 (land included in price), depreciated $150,000, sold $400,000
• if sold, A would have gain of $300,000 but instead did a 1031 exchange.
• In your case, exchange for 3 properties. Sr living center is 18% of the total cost of new properties. The new basis is purchase price - 18% of the $300,000 gain that is being deferred.

3. Yes, in your case 18% of the deferred gain will be subtracted from your basis.

4. I believe you are trying to use the 2 schedule method - which won't work in TurboTax. Your old depreciation values are used to calculate the basis in the new property. The new property must begin a new depreciation schedule using the correct years for the property type. You will subtract out the land value of the new building to depreciate only the building now in use.

5. Ford ctr - same steps as above using 54%. This depreciation mismatch is exactly why you just have to use prior depreciation as an adjustment to the basis of the new property. The new property has a new depreciation schedule starting with its purchase and new adjusted basis.

6. Yes, the oil and gas property have a reduced basis and there is no depreciation schedule. You just maintain the records for the future.

[jamie-m-todd]

@AmyC 

Good morning Amy!  Thank you so, so much for your detailed response!  I'm going to take a little time today to digest it.

I do have a quick question now.  Based on Diane's input it seems like you can apply the 2 schedule depreciation approach because each replacement property can have 2 asset/depreciation entries in TurboTax - one for the original basis tied to the relinquished property, and one for the additional basis associated with the purchase of the replacement properties.  In the Sale of Business Property section, TurboTax does show you the 2 different basis numbers.  

My initial thought is that the benefit of the 2 schedule approach is that you get to depreciate the remaining original basis of the relinquished property at a faster rate - over the remainder of the 27.5 years (which is 9 years in my case), versus starting the clock over and spreading the depreciation expense over the full 27.5 years (or 39 years in the case of the Ford Distr Center).  Therefore, your annual depreciation deduction is a higher amount.

Am I missing something?  I'd love to hear your thoughts on that.

Thanks so much!

Jamie

@DianeW777 

[AmyC]

The two schedule method is preferred due to the increased depreciation. You are absolutely correct! It is a hassle to use it with multiple properties and some suggest that -for sanity - those with multiple properties may not want to use it.

I just didn't realize that you could maintain a depreciation sheet using an old date for depreciation on a property with a new date in service. I did not think the program could handle it as it could not in the  past.

Also, DianeW has been off a few days and will be back Monday 🙂

[jamie-m-todd]

@AmyC 

Thanks for the update on Diane!  🙂

Diane instructed to use the original purchase date and in-service date from the relinquished property for the 3 replacement properties for the asset/depreciation entries associated with the original basis.  Also, split up the original purchase price, land value, and depreciation across the 3 properties...using those percentages that I provided earlier.  So hopefully I can get the numbers to work to allow me to do the 2 schedule approach.  If not, I'll take your great information and go with the single depreciation schedule.

Again Amy, I so appreciate your help and insight!  

Have a great weekend!

Jamie

@DianeW777 

[jamie-m-todd]

@DianeW777

@AmyC 

Good afternoon Diane,

I hope that you are doing well.

It has been almost a year since you and AmyC helped guide me through completing the 1031 exchange portion of my 2022 tax return using the TurboTax Premier software.  I never could have managed to successfully file my taxes using your “2 schedule” approach without your assistance!

As I initiate my 2023 tax return I am faced with a similar challenge to last year.  However, it has a slight twist that I’d greatly appreciate your insight on.  At the highest level, the apportioned basis to Replacement Property 2 (which is a convenience store/fuel center) is calculated out to be a negative value, and I do not know how to account for that.  I believe it all stems from the fact that because the 2 other replacement properties (properties 1 & 3) are mineral rights (with no land ownership) I am unable to allocate any of the relinquished property’s land to them, and thus it all goes to Replacement Property 2.  However, I still have to fairly allocate the original basis of the Relinquished Property across all 3 replacement properties - even though I cannot use that basis for the properties with the mineral rights.  Here is how I got there:

Relinquished Property:

• $320k cost
• $64k land value
• $166k prior depreciation
• $89k remaining basis

Replacement Property 2:

• $84k apportioned cost
• $64k apportioned land value
• $44k apportioned prior depreciation
• Calculation = $ Apportioned Remaining Depreciable Basis = (Apportioned Cost minus from (Apportioned Land Value from Relinquished Prop + Apportioned Prior Depreciation from Relinquished Prop)
• $84k – ($64k + $44k) = -24k

To note, the additional basis coming from Replacement Property 2 (which has a structure that can be depreciated), after being allocated across all 3 properties, is not enough to offset the negative basis coming from the Relinquished property for Replacement Property 2.

What do I do when it is a negative basis value?  Do I enter the -24k, or the value $0?  How is this usually handled?

Any guidance here will be greatly appreciated!

Thanks,

Jamie

[butler18435]

To whomever has time to answer me.

In June of 2024 we sold a long held apartment building through a 1031 into 8 DST's scattered across the country.  I have entered 8 new Schedule E's (one for each of the properties).  Three of those assets did not have any debt and no debt was assumed and five of them did have debt.  They are all commercial or multifamily residential properties.  I am confused on how to calculate the total cost of the asset on line 4 of the asset entry worksheet.  Talking with a CPA friend he said I needed to allocate the roughly 555,000 in basis from the original property to each specific replacement property and enter that as the total cost of each asset.  Can you clarify for me?

Thank you

Bret

[DianeW777]

Yes, that can be done to use the original asset and keep it in play as though it was never traded. Simply continues on in the 8 replacement properties. This keeps the depreciation on the right track as indicated below.

Depreciation Rules:

The basic concept of a 1031 exchange is that the basis of your Old Property rolls over to your New Property. In other words, if you sold your Old Property for $100,000, and bought your New Property for the same, your basis on the New Property would be the same. It makes sense then that your depreciation schedule would be exactly the same, and does not change! In other words, you continue your depreciation calculations as if you still own the Old Property (your acquisition date, cost, previous depreciation taken, and remaining un-depreciated basis remain the same).

Buy Up: Likewise prorate any 'buy up' to allocate a piece to each of the 8 DSTs (as a new asset for each property). 

If you 'buy up' in your exchange (your New Property cost more than you sold your Old Property), the answer is easy – you treat the buy up part as you would a new addition to an existing property. In other words, you treat the amount of the buy-up the same as you would the cost of construction, for example, of a garage added to an existing house – the cost is the amount of the buy-up; the date you start depreciating it is the date you purchased the new property; and the depreciation method you use is the method most appropriate for that type of property in the year you bought the New Property (regardless of the method you used for the original house). If you think of it this way, then it's easy, even if your property is a large office building or a more complex purchase.

Enter a new asset for any buy up/added cash in the exchange including the purchase/selling expenses you paid in the trade. The new asset will begin depreciation on the completion date of the trade/like kind exchange.

• The date placed in service for any buy up is the date of the exchange.

Boot: Any property or money you might have received that is unlike property in the exchange would be immediately subject to capital gains tax. 

@butler18435