1031 Exchange with Multiple Properties

[Dave918]

I did a 1031 exchange using a QI last year where I sold one rental house and replaced it with 2 rental houses. Most of the proceeds that the QI held from the sale went into the first purchase (only about $3500 was left which over went into the 2nd purchase so I didn't have any boot). How do I allocate the basis (and the tax gain that I am deferring via the 1031) between the 2 new houses? Everything I've read online says that I must allocate it proportionately based on the purchase price of the new houses (even though the QI wired most of the money from the sale to the first house and only $3500 to the 2nd house). Is this true? Thank you in advance for your response.

[Mike9241 · Accepted solution]

wasn't there separate purchase prices stipulated for each replacement property. there should have been. if not contact the QI.

if you only had $3500 left how did you come up with any additional equity needed to close on the second property. put personal cash in? take out a mortgage? 

we can't see the closing documents but it seems some information is missing.

purchase price of property 1

divided by purchase price of property 1 and 2 

times the deferred gain is the amount of deferred gain to allocate to property 1 the rest goes to property 2 (the cash that the QI used to close month properties has no relevance here)

purchase price of property 1 reduced by the allocable portion of the deferred gain

is its net basis.  from this a portion needs to be allocated to land based on the FMV of the land to the total FMV of the property times the net basis

the same is done for property 2

[Dave918]

Good Evening Mike

"the cash that the QI used to close month properties has no relevance here"- You are saying that the amount of cash the QI wired to close replacement property A vs replacement property B does not matter, correct? I thought that was the case I just wanted to confirm that.

The QI wired the funds to close the first property A with $3500 left over. I wired $170K to close the 2nd property B and the QI wired the remaining $3500.

But it sounds like that doesn't matter that I can just divide the exchanged basis (the adjusted basis of the sold property minus exchange expenses) between replacement prop A and replacement prop B based on their Fair market values. Another way of looking at it would be that I allocate the deferred gain between replacement prop A and replacement prop B based on their fair market values. It sounds like the IRS doesn't care about how much cash the QI wired to each property. Does this make sense?

Thank you for your help.

[DianeW777]

Yes, it makes sense.  The IRS cares about using the QI for a like kind exchange (Section 1031) and would want to see the cash exchange if they were ever to audit or request information about your exchange.  

Keep the records with your tax returns until the properties are disposed of in the future through sale.  If another exchange takes place in the future the documents must be kept until the last property is sol.

[candycanepanda]

When talking about allocating "it" porportionally here, are we talking about everything? 

So, do we porportionally adjust 

-Adjusted Basis 

-AMT Adjusted Basis 

-Fair Market value of the like-kind property you gave up

-Value of mortgages 

OR, do I just porportionally allocate ONE of the things? 

[bobbornt]

If the second property is subsequently sold for $173,500 is the 170,000 free of gain and the 3,500 still exchange money to be moved into another 1031 or taxed at its original basis? Or has the 170,000 been diluted by its use in the second transaction?

Seems - if so, then it would have been better to pay the gain tax on the 3,500 rather than dilute the 170,000.

Thoughts and/or comments. I am in a similar situation.

[karenfaye7]

Thank you!! I relinquished one property for two as well. When entering the purchase property I'm only given the option of entering one address with date of purchase, date of id, and FMV. How do I enter the second property I purchased? This is for 2021 desktop.

[GeorgeM777]

You cannot enter a multiple property exchange in TurboTax using the method you describe in your post.   In a typical 1031 exchange where one property is exchanged for another property, TurboTax will prepare Form 8824, Like-Kind Exchanges, and lines 12 - 18 will reflect, among other things, the realized gain, recognized gain, the fair market value (fmv) of the property you received, and your adjusted basis in the property you transferred.  However, in a multi property exchange, lines 12 - 18 are not completed.  Rather, you must attach your own statement showing how you figured the realized and recognized gain and enter the correct amount on lines 19 through 25.  (Note: the realized gain is the difference between your adjusted basis and the fmv of the property.  The recognized gain is that portion, if any, of the realized gain that is taxable).

It is good that you are using the desktop version of TurboTax because the entries you will make on lines 19 through 25 have to be manual entries.  Manual entries are effected by selecting Forms mode, upper right of your screen, and from the list of forms in the left margin, select Form 8824.  If you don't see Form 8824 in your list of forms, then select Open Form and in the search window enter Form 8824, then select Open Form again.  When Form 8824 is open, double-clicking in various fields will allow you to enter information.  

@karenfaye7