Depreciation after 1031 Exchange using Separate Depreciation Schedules Using Turbotax Premier

[Dave918]

What is the proper procedure in Turbotax Premier for continuing the depreciation of assets from the asset that was sold/exchanged in a 1031 Exchange (the "exchanged basis")? I am trying to use the separate depreciation schedules to continue the depreciation of the old asset that was sold ("exchanged basis") and the excess basis (which is depreciated on a new 27.5 year schedule). This is described as option 1 (Separate depreciation schedules) below:

https://www.millionacres.com/taxes/depreciation/depreciation-after-1031-exchange-how-it-works/

The asset that was sold ("exchanged basis") has already been depreciated for 86 months so I need a way to add a new asset that can be depreciated for the remainder of it's 27.5 year depreciation schedule (27.5 years - 86 months). I am trying to create a new asset because I can't simply reassign the asset from the old schedule E to the new schedule E because the exchange occurred in September 2021 so it was being depreciated on the old schedule E this year (I also exchanged one property for 2 properties so I need to split the exchanged basis between the 2 new properties). I tried entering the new assets and manipulating the Asset Entry Worksheet to make this work but I get an error in box 10 if I try to manually enter prior depreciation.

I know there is a simpler way to do this using a new single depreciation schedule of 27.5 years (option 2 treating the replacement property as a new asset in the same article) but this would cost me hundreds of dollars every year in depreciation because I would be depreciating the old asset ("exchanged basis") over 27.5 years when I could be depreciating it over the remainder of it's prior depreciation schedule (20 years in my case).

Thank you in advance for your response.

[DianeW777]

There is no change to the existing assets.  You continue the depreciation as though there was no trade. Then with any extra cash that was paid for the replacement property (the property received in the exchange) you set up a new asset and begin depreciation in 2020 as residential rental 1property using 27.5 year recovery period (depreciation method).

If you buy up in your exchange (your New Property cost more than you traded your Old for), the answer is easy – you treat the additional cash 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 a capital improvement.

Basic Concept: 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, which it is! 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).

[Dave918]

Your answer doesn't help me. You are explaining the concepts which I understand pretty well and I'm asking for help with Setting up depreciation in Turbotax premier. As I stated the issue is that the old asset (property that was sold) was still being depreciated until Sept  2021 and one asset can't be in 2 places on the same return (also I need to split the asset between 2 replacement properties). So I need to set up a new asset for each of the 2 replacement properties (with the prior 7 years of depreciation) to represent the old property in each of the 2 new properties. How do I accomplish this in Turbotax Premier?

[DianeW777 · Accepted solution]

If you traded one property for two property you should follow the procedures previously provided.  If you want to set up two properties  because you now have two properties, (makes sense to more easily track if only one gets sold in the future) you can take the cost of the old property and split it in half.  

Steps to complete.

1. Go through the original asset and mark that it was removed from service (Sold, disposed of, etc).  
2. Enter the date it was removed from service. Do not select special handling.  Do not enter any sales price. This will allow depreciation for the period it was in service during the year. Write down the cost, prior and current depreciation as well as date placed in service.
3. Divide those numbers in half.
4. Add two rental houses/units the original date placed (property traded) in service to maintain the recovery period.  This is where it might get tricky if you don't have the TurboTax CD/Download.  If you do then you will need to go to the Asset Entry worksheet in Forms Mode to correct the depreciation amount for these two assets.  The chart for 27.5 year property is provided below so that you can use it to calculate the correct amount (Sep using year 1 to get the correct amount for 2021 only).  2022 will be automated correctly by TurboTax.
5. Finally, add any additional asset for any additional payment made for the the two new properties as a new asset placed in service in the month the trade was complete.

[Dave918]

Thank you - this is what I needed.

[Dave918]

There is a gap between when the old property in the 1031 exchange was removed from service and the replacement properties went into service (this is about 60 days in my case). To compensate for this would I add 60 days to the in service date of the original property (which was in 2014) to keep the same 27.5 year depreciation schedule? Thank you.

[MaryK4]

No, you must start depreciation on the new property on the actual date the property is placed in service.  You will add as a new asset.

@Dave918