My father deeded over a commercial rental building to my brothers and me on 12/18/2002 with a life estate to himself. We sold the property on 9/30/2022 and are in the process of doing a 1031 exchange. We have already closed on one property (2/1/2023) and are still in the due diligence period for another property which should wipe out our 1031 money. We received a 1099-s which states $0.00 in box 2. If you could guide us on where in TurboTax to fill in the areas needed. We are needing to take advantage of the 1031 exchange and maintain the Step-up in basis while our father is still alive. Your help would greatly be appreciated.
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The following guidance is how you enter a 1031 exchange in TurboTax and will provide guidance for the current and new assets for depreciation.
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).
If you "bought-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.
When you have your TurboTax return open you can use the following steps to update the original assets for the exchange.
Next you will complete the like kind exchange, Form 8824 (Section 1031 exchange):
If you marked the original assets as sold, traded, etc (see 6. above) then go back to your rental activity and then enter new assets with the exact same information as the property given up with a new name, but with the same date placed in service as the old property, for all assets that are part of the exchange.
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.
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