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

[jamie-m-todd]

I’ll first apologize to my lengthy inquiry.  However, I believe providing real information with hopefully real answers provided by tax experts will assist myself and others in understanding how to file taxes for a Relinquished vs. 2+ Replacement properties, as well as how to work with DST 1031 investments.

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)

Replacement Properties (3) – DSTs (using my numbers rounded as an example)

$903,000 = Total Replacement Cost

Property 1 = Oil & Gas DST

• $250,000 = Purchase Price (Equity)
• 27.7% = Percent of Total Replacement Cost = $250,000/903,000
• $24,930 = Portion $’s of Exchange Basis = 27.7% * $90,000 Exchange Basis
• $225,070 = Excess Basis = $250,000 Purchase Price - $24,930 Exchange Basis

Property 2 = Ford Distribution DST

• $493,000 = Purchase price =  $250,000 (Equity) and $243,000 (Loan)
• $54.6% = Percent of Total Replacement Cost = $493,000/903,000
• $49,140 = Portion $’s of Exchange Basis = 54.6% * $90,000 Exchange Basis
• $443,860 = Excess Basis = $493,000 Purchase Price - $49,140 Exchange Basis

Property 3 = Senior Assisted Living Facility DST

• $160,000 = Purchase price (Equity)
• 17.7% = Percent of Total Replacement Cost = $160,000/903,000
• $15,930 = Portion $’s of Exchange Basis = 17.7% * $90,000 Exchange Basis
• $144,070 = Excess Basis = $160,000 Purchase Price - $15,930 Exchange Basis

Questions:

PART-1

1. Please let me know if any of the aforementioned calculations are incorrect based on the Relinquished property and the 3 Replacement Properties.
2. Adjusted Basis (8824 Line 18)
1. $208,000 = $90,000 Exchanged Basis from Relinquished property + ($243,000 Loan of 2nd Replacement Property - $125,000 Loan from Relinquished Property)
2. Is the $208,000 the correct amount to proportion across the 3 replacement properties, or is the Exchanged Basis of $90,000 coming only from the Relinquished property the correct value?
3. How is the proportioned number entered as the basis for the 3 Replacement Properties? 
1. “Wages & Income” to “Rental Properties and Royalties” to “Assets/ Depreciation” to “Your Property Assets" to “Rental Real Estate Property” to “Nonresidential real estate” to “Tell Us About this Rental Asset”
2. If we consider the Replacement Property 2, is the “Cost” equal to the Purchase Price of the replacement property ($493,000), OR is the “Cost” equal to the proportioned Adjusted Basis number, either $90,000 or $208,000 depending on the answer above?  Or, should the proportioned Adjusted Basis number be its own additional Asset/ Depreciation line item, in which you have both the depreciation for the Replacement Property using the Purchase Price ($493,000) AND you have the proportioned Adjusted Basis as well?
3. What should be provided for the “Date purchased or acquired” – either the Purchase Date of the Replacement Property (3/16/2022) or the Purchase Date of the Relinquished Property (2/20/2004)?
4. Under, “Tell Us More About This Rental Asset”
1. Should both of these items be checked:  “I traded in an old asset to acquire this one”, and “I purchased this asset”?
2. What is the benefit of inputting the Excess Basis numbers?  It does not seem to change anything about the asset depreciation.

PART-2

1. Rental Property Expenses for the Replacement Property 2 with a loan.
1. Can all of these items be entered under “Any Miscellaneous Expenses” = Commissions, Dealer Manager Fees, Marketing & Due Diligence, Third Party Due Diligence, Acquisition Fee to TRS, Offering & Org Costs, and Deferred Financing Costs?
2. Do any of these need to be amortized, so they need to go in a different section such as “Enter Loan Information”.  I believe all of these items are up front costs to secure the property and the loan, and not yearly fees to manage the property.  So they probably should be located in the “Loan Information” section, which appears to amortize items, and not the “Any MISC Expenses” section which does not appear to amortize items.
2. Can we only provide a single 8824 form using the numbers in aggregate, or do we also HAVE to provide a worksheet that details the breakout for the 3 DST Replacement properties, and thus have to mail in our tax filings instead of Efile?  Would not providing a worksheet of the details create red flags to the IRS, thus a higher probability of being audited?
3. The DST provided a different depreciation number than what TurboTax calculated.  So should we use their number instead – as a replacement, or should I add the difference in depreciation as a new entry?
4. Do I need to figure out the price of Land for both the Ford Distribution Center and the Senior Living Center for depreciation if the Cost is replaced by the Exchanged Basis from the Relinquished Property?.  If yes, is there a general formula for Commercial properties?  The DSTs did not provide a improvement value vs. land value breakout in any of the closing documents.
5. Do we need to file taxes in each state in which the Ford Distro and Senior Living are residing?  It seems like we don’t need to do that for Peregrine (Oil & Gas).
6. How do I claim the remaining finance charges associated with the loan from the Relinquished Property ($35 & $41?) that were being amortized over the length of the loan, but now I have them as stopped using on the Assets/ Depreciation section for the Relinquished Property.
7. Do any of the 3 Replacement Properties qualify for Qualified Business Income?  I have never used Qualified Business Income for my 3 single residence properties.

[DianeW777]

Yes, you have calculated the correct basis to apportion to all three buildings you received in the section 1031 like kind exchange. ($208,000). Read the information next.

1. The original property of $90,000 remains in tact as an asset and continues from the original acquisition date.  The remainder basis is apportioned to the new buildings/assets.
2. Enter the 'additional amount' (or buy up fees) as two assets for the additional building(s) and their recovery period begins on the trade date in 2022 (03/16/2022).
3. I suggest entering two new assets by apportioning the remaining additional basis between them. You can do that by using the value of each by the total to apply the percentage against the remaining additional basis. 
   1. When you enter the new rental you will select 'Commercial (non personal use such as business office, warehouses, etc' this will provide the correct 39 year depreciation schedule for the new assets.
   2. To keep it simple I would select that you purchased the assets
4. Part 2: All fees with the exception of marketing would be added to the cost basis as part of the buy up charges.  Add those fees to the assets mentioned above before apportioning it.
5. When you enter the new properties (Add another property for each building), you will select as noted above and they will be depreciated using the correct 39 year recovery.
6. You do need an amount for the land for each building. You have one for the original building, use the formula above to figure out the land value or determine a land value you feel is adequate based on acreage and fair market value (FMV)
7. You may have to file a return in each state where the buildings are located if not in your resident state.
   1. Do I need to file a state return? - Click the states in question to see if you are required to file.  It may be the gross rents and not the net that is required or it may be required simply because you are required to file federal.
8. If you have lending with a new bank for the properties acquired, then you can expense the remaining balance of the finance fees from the original loan.  If not, then you add any additional loan fees or points to the remaining points and amortize them over the life of the new loan.
9. If you believe you meet the requirements to use the qualified business income deduction (QBID) you are entitled to take it.
   1. Can I get the QBID on my rental income? Click the hyperlinks
10. Finally, one Form 8824 should be sufficient.  Keep all of the documents and information that you used to complete the form.

[jamie-m-todd]

Hello Diane,

Thank you for taking the time to answer all of those questions!

I'll look over your comments today and let you know if I have any additional questions.

I do have one question now.  Is someone like yourself able to become a Live Agent to assist in a similar fashion as a TurboTax CPA with the TurboTax Premier Live offering?  Is someone able to specifically request your assistance?

Thanks!

Jamie  

[DianeW777]

Yes, you can request TurboTax Live if you are using TurboTax Online by following the instructions in the link below.

• How do I get TurboTax Live?

You are not able to specifically ask for me, but we have tax experts who have all the experience you will need to assist you.

[jamie-m-todd]

Hello Diane,

Can you please confirm my understanding of your comments if you could be so kind:

1. Keep the Relinquished property as an asset with its original acquisition date.  Taking the remaining basis of $90,000 to be eventually allocated proportionally across my 3 DST Replacement properties.
2. Calculate any additional basis associated with my 3 Replacement properties.  Per TurboTax, it is calculated as the Debt incurred across my 3 Replacement properties ($243,000) minus the Loan amount ($125,000) from the Relinquished property.  The additional basis comes to $118,000
3. Together, the entire basis (Exchange Basis) of $208,000 will be proportioned across the 3 Replacement properties.
4. Now assume I am building the 3 Assets (only building 1 additional Asset for each Replacement property) in the Rental Property section (to build the Schedule E).  When I come to the Cost field for each Asset, I will enter in each respective portion of the $208,000 Exchange Basis.  Correct?  However, when it comes to the cost of the land - for example, say 5% of the total cost - Is that 5% of the Asset's portion of the $208,000 Exchange Basis?
5. One of the Replacement properties is an Oil and Gas Royalty based DST.  There is not a land cost field when building the Asset for this property, as it is treated differently because it is all land in the first place.  For this Asset, I only populate the proportioned Exchange Basis.  Please confirm.
6. In the same section it asks for the Excess Basis.  Is the correct formula as follows:  Asset's Fair Market Value (equity and debt) minus the Assets portion of the Exchange Basis.  So when I look at Replacement property 1 in my example, it is $250,000 minus $24,930 to equal $225,070.  Is that correct?  Then for Replacement property 2 it is $493,000 (both equity and debt) minus $49,140 to equal the $443,860 of Excess Basis.  Correct?
7. After I populated the Excess Basis for each of the 3 new Assets, when I looked in the forms view, the Excess Basis field for each of the 3 Replacement properties was flagged as having an error.  Is that indeed an error, or is this the result of doing a 1031 Exchange with more than 1 replacement property.  If it is indeed a mistake, how can it be corrected?  What should I validate?
8. Please confirm, after I complete the process, I should have only 4 line items on the Rental and Royalty Summary page, representing the 1 Relinquished property and the 3 Replacement properties.  For each of three Replacement property line items, there will only be 1 Asset associated with them in which I use the proportional Exchange Basis and proportional Excess Basis.  Is that correct?

Please let me know if I need to clarify any of my points/questions.

Again, I so greatly appreciate your help Diane!

Thanks,

Jamie

[jamie-m-todd]

@DianeW777  Hi Diane, I just wanted to see if you saw my follow-up questions?  Or perhaps @AmyC might know as well.

Any additional help would be greatly appreciated!

Thanks!

Jamie

[DianeW777]

Please see the answers to  your questions below.

1. Yes, essentially you can leave this asset in tact and just change the name of it.  It can continue as is with the same original acquired date and remaining basis continuing the depreciation as though there was no trade.  You can choose to allocate it to the three properties making three assets by dividing the $90,000 by 3 and set up each one for each property.
2. Yes, the additional basis of $118,000 should be allocated to each of the three properties as a new asset with a date placed in service as the trade date.
3. Yes.  One asset with the original date acquired and prior depreciation and one new asset with the new date, starting the recovery and depreciation from the trade date.
4. For each building/property: You will enter two assets one with the portion of the $90,000 and one with the portion of the $118,000.  Use the percentage of land and enter that on each property.
5. Yes, that is correct.
6. As long as you have made what you consider to be the appropriate portions,, setting up two the assets as instructed above, there should be no errors.
7. See number 6.
8. You should have two assets (see 1 & 2 above) for each property with the exception of the oil & gas property since there is no building and only land. You would have a portion of the land from the original building and there would be no actual asset listed for the property.  You must keep track of the land you apportioned to this property in your records.

[jamie-m-todd]

@DianeW777 

Hello Diane,

Thank you for all of those additional details! 

From what I understand from your comments, you are suggesting to apply a "two schedule" depreciation method for each of the replacement properties.  In this setup, each property will have 2 assets, as you described.  The first asset can be replacement property A as it is tied to the exchange basis from the relinquished property, with its portion of the $90,000.  The 2nd asset would be replacement property A as it is tied to its portion of the additional basis ($118,000) created by the added cost/FMV between the relinquished property and the 3 replacement properties.   Did I understand that correctly?

Questions:

1. Is the downside to leaving the relinquished property in tact, and continue as is with the original acquired date and remaining basis, the fact that whenever you eventually sell one of your replacement properties, you will have to break out the relinquished property's basis at that point?  Is there any other drawback to this suggestion?
2. Instead of using the "two schedule" approach, can I apply the "single schedule" depreciation method that first summarizes the original basis ($90,000) with the additional basis ($118,000), and then proportions out the total amount ($208,000) across the 3 replacement properties?  Then I would only have 1 asset per replacement property?  Correct?  Or does the fact that one of the properties is Land only (Oil and Gas), that prevents me from using the "single schedule" depreciation method?
3. If the "single schedule" method is still feasible, is the downside to using it the fact that the original basis ($90,000) would be spread across each new replacement property's depreciation schedule - which would be 39 years in the case of the Ford Distribution Center and 27 1/2 years in the case of the Senior Living Center?  Whereas if I created individual assets for the original basis and the additional basis for each replacement property, then the $90,000 would have a much shorter depreciation schedule - 8 years in my case (to get to 27 1/2 years) instead of 39 or 27 1/2 years?
4. In respect to setting up the asset for the Oil and Gas replacement property, I'd appreciate further details on your answer #8.   What does this mean in respect to the original basis ($90,000) and the additional basis ($118,000) - "You would have a portion of the land from the original building and there would be no actual asset listed for the property" ?
5. If the Oil and Gas property cannot leverage the additional basis ($118,000), can it be proportioned between the 2 replacement properties versus 3 replacement properties.

Again Diane, thank  you so much for your must needed assistance!

Thanks,
Jamie

[jamie-m-todd]

@DianeW777 

Sorry Diane, another question, as it relates to the "two schedule" depreciation approach.

6) How would I figure out the Excess Basis value as it relates to the original basis ($90,000) being proportioned across the 3 replacement properties, and the Excess Basis value as it relates to the additional basis ($118,000) being proportioned across the 2 properties (if the Oil and Gas property needs to be excluded in this case) ?  When I calculate the Excess Basis as two separate calculations, the total far exceeds the total deferred gains and the number I had when using the "single schedule" depreciation method.  Do I need to somehow proportion out the replacement property's total costs/FMV between the original basis ($90,000) and the additional basis ($118,000)  BEFORE doing the Excess Basis calculation?  Right now I am using full values for both calculations.  So as an example, in the case of the Ford Distribution property, having a value of $493,000, I'm using $493,000 minus Ford's original basis proportion of the $90,000, AND I'm using $493,000 minus Ford's additional basis proportion of $118,000.  Should that $493,000 be first split up somehow?

Any insight here would be so greatly appreciate!

Thanks so much!

Jamie  

[DianeW777]

There are only two total assets for depreciation. 

1. The original $90,000 that continues to depreciate from the original acquired date, continues as though there was never a trade.  
2. The cash up on the exchange of $118,000 with an acquired date of the trade date, like a new asset.

In your situation you have a property received that has no building, so for this reason you must apportion the land value appropriately to each of the three properties you have now.  Do this in a method that makes sense based on the acreage.

1. The original land value of $62,000

The buildings on two properties will also need to be apportioned appropriately in a method that makes sense (some ideas provided earlier in this thread). For the buildings each will have two assets:

1. A portion of the $90,000 (plus a portion of the land of $62,000).
2. A portion of the $118,000 (you must decide if a portion of this should be considered land for each of the three properties).

it will be easier if you apportion the original building and land now to each of the properties received versus waiting until one of then is sold or traded later.

[jamie-m-todd]

@DianeW777 

Good afternoon Diane,

Thank you once again for your great comments.  I'll need a little time to digest things, but you did give me another variable that I need to include in this process - the land value of the original Madison property.  This is a point that I failed to include in any of my numbers.  Thank you for highlighting that!

Another question that you might not have seen was #6 dealing with Excess Basis calculations (please see in earlier message).  I'd greatly appreciate it if you could give me some thoughts on how that should be calculated with 2 different basis numbers to consider.

Thank you so much!

Jamie

[jamie-m-todd]

@DianeW777 

Good evening Diane,

I think I am slowly going in the correct directly.  I could never have come this far with your dedicated help!  Thank you so much for this!

I’ve tried to break down the discussion by Property.  Hopefully it makes all of the details easier to digest and follow.

Replacement Property 1:  Oil and Gas

1. Please confirm the following are true:
1. Should only be apportioned land from the original property – a portion of the $62,000. 
2. The land size will be calculated by taking the total square footage of the land across all co-owners, and multiplying it by my percentage of ownership of the land value.  Hopefully that is ok?  If not, the Oil and Gas property would end up with 99% of the $62,000 due to its size – being 1,000’s of acres versus 5 or 10 like the other properties.
3. The portion is based on the land size of the Oil and Gas property as it is compared to the land total across all replacement properties.
4. The Asset’s basis value from the original property ($90,000) does NOT get portioned to the Oil and Gas property.
5. The Assets basis value from the replacement properties ($118,000) does NOT get portioned to the Oil and Gas property.
6. Any Land value from the $118,000 should NOT be proportioned to the Oil and Gas property.  I’m not as sure about this statement.
2. How do you apportion the $62,000 to the Oil and Gas property using TurboTax Premier?  Can you please provide the pathway to where this value can be entered using the Step-by-Step guide?  I’m currently following this path, but it does not seem correct, as it is depreciating the value I populate as the “Cost”…and land should not be depreciated.  “Assets/Depreciation” TO “Your Property Assets” (choose “Add an Asset”) TO “Describe this Asset” (choose “Rental Real Estate Property”) TO “Tell us a Little More About Your Rental Asset” (choose “Land Improvement”) TO “Tell us about this Rental Asset” (populate “Cost” and “Date purchased or acquired”).
3. I then populate the “Excess Basis Amount” on the following screen (“Tell us more about this rental Asset”), with these fields check marked:  “I traded in an old asset to acquire this one” and “I purchased this asset”.  This may also be an error, if the path above is incorrect.

Replacement Properties 2 & 3:  Ford Distro Center and Senior Living Center

1. Please confirm the following are true:
1. Both properties should be apportioned land from the original property – along with the Oil and Gas property– a portion of the $62,000.
2. The Asset’s basis value from the original property ($90,000) DOES get portioned between the 2 properties.  The proportioning calculation does NOT include the Oil and Gas property.  Therefore, the total cost that drives the apportioning of the $90,000 only includes Properties 2 and 3.
3. The Assets basis value from the replacement properties ($118,000) DOES get portioned between the 2 properties.  The proportioning does NOT include the Oil and Gas property.  Therefore, the total cost that drives the apportioning of the $118,000 only includes Properties 2 and 3.
4. Any Land value from the $118,000 should be based on the Land Cost as it compares to the total cost of either Property 2 or 3.  For example, if the Land Cost of the Senior Living Center (Property 3) was only 5% of the total $250,000 cost for that property, the Land value would equal 5% of Property 3’s portion of the $118,000.
2. When entering Properties 2 & 3 as Assets, the path to populate both the Asset cost and the Land cost seems more intuitive.  One you select “Rental Real Estate Property”, followed by “Residential Rental Real Estate” (where before I picked “Land Improvements” for the Oil and Gas property), you are able to populate the total cost of the property under “Cost”, and then the land portion of the total cost under “Cost of Land”.  Please confirm this is the correct location.

Your comments would be so greatly appreciated!

Thanks,

Jamie

[DianeW777]

The answers to your questions are prepared in sequence to better assist you.

Replacement Property 1:

1. The following will show whether confirmed:
   1. Yes, you should apportion the original land value to all of the current properties.
   2. Your formula seems like an accurate apportionment for the land.
   3. Same as number 2. above.
   4. I concur with this because there is no building on this property.
   5. I would consider that part of the $118,000 is land for the oil & gas property since it was part of the trade.
   6. Same as number 6. above.
2. You will not be able to enter an asset for only land in the oil & gas property.  This will be a paper record until the day you sell it or trade it.
3. Mark each property as purchased and not traded.

Replacement Properties 2 & 3.

1. The following show whether confirmed:
   1. Correct - Apportion the original land value between all three properties
   2. Correct - The original building is apportioned between the buildings 2 & 3.
   3. Exception - See 5. above
   4. Exception - See 5. above 
      1. Once you decide a portion of the $118,000 is land you can use your formula to arrive at the amount for each property 1, 2, & 3. 
2. Yes, you are entering the buildings accurately in the asset section.

[jamie-m-todd]

@DianeW777 

Good morning Diane,

Thank you once again for providing your valuable insight!  I'll walk through through your comments today and start applying your recommended changes in the TurboTax program.  I do have a quick follow up questions:

1. Should Oil and Gas mineral rights even be apportioned the land from the original property or the additional basis from the 3 replacement properties?  I don't technically own the land, but the minerals beneath it.
2. Should the additional basis be spread across the 3 replacement properties even if 100% of it came from the loan/debt tied to replacement property 2 - Ford Distro Center.
3. Will the proper tax forms be created as part of the 1031 exchange process if you do not Mark each property as traded ("I traded in an old asset to acquire this one")?  I thought this question was specifically asked for 1031 situations.

Thank you so much!

Jamie  

[DianeW777]

No, if you do not own the land and only the mineral rights then no amount of the assets should be applied to land for the oil & mineral property.  It was not previously clear there was no land ownership with this property.

Yes, the additional basis should be applied to all three properties because they are all tied to your original property traded in the transaction. All cost basis belongs to all three properties.

I would suggest that you enter the assets as purchased and do not enter the excess amount for these properties.  In stead complete the assets as we discussed and then complete your Form 8824 for the like kind exchange.

1. Under Wages and Income scroll to 'Other Business Situations' > Select Show More > Start Sale of Business Property
2. Check the box next to Any additional like-kind exchanges (section 1031) > Continue
3. Follow each screen to make your entries > Your Form 8824 will be completed for you based on your entries
4. See the images below for assistance