How to depreciate trade-in rental property

[Yi-Na]

Hi, 

I traded-in my old rental property and some cash to get  a new rental property in 2020.

How do I depreciate the new rental property for 2020 tax return.

Is it how much cash I paid plus adjusted cost basis of old house  or  the FMV of old house?

Thanks!

[M-MTax]

Did you do a 1031 exchange or did you sell one property and buy another? 

[Yi-Na]

I did exchange.

[DianeW777]

You depreciate property you received in a like kind exchange (Section 1031), as though you never gave up the original property.  You use the same adjusted basis as the property given up. If you paid money in addition to the property given up then you would depreciate the additional cost over the same recovery period.

• Where do you enter a like-kind  or Section 1031 exchange?
• IRS Fact Sheet for Section 1031 Exchange
• IRS Instructions for Form 8824

[M-MTax]

You're going to need help with this and there are elections you can make for depreciation. You need a thorough understanding of tax law and exchange regulations. Turbotax is also not well suited for this type of thing either. 

[Yi-Na]

@DianeW777 

what does recovery period mean?

[DianeW777]

The recovery period is the number of years that you depreciate an asset.  The IRS has a set range for each type of asset. In your case, for residential rental property the recovery period begins at 27.5 years.

• IRS Publication 946

[Yi-Na]

@DianeW777 

So in my case, I have already depreciated my previous asset for 5 years. Now that I received this new asset through trade, I would continue to depreciate my new asset (previous asset's adjusted basis+cash) for the next 22 years (27-5=22), is that correct?

[M-MTax]

You can choose separate depreciation schedules or treat the replacement property as a new asset. https://www.fool.com/millionacres/taxes/depreciation/depreciation-after-1031-exchange-how-it-works/

[DianeW777]

To be clear, 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 property using 27.5 year recovery period (depreciation method).

If you buy up in your exchange (your New Property cost more than you sold 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.

[ccthealias]

Can someone explain how do you tactically do this in the TurboTax premier version. I actually know what the math should be but does not know how to enter the form correctly in TurboTax 

[Critter-3]

Doing it yourself is not always the correct thing to do and especially with this situation as you will likely need the downloaded program and make direct form entries as the interview mode will not do the trick.

I HIGHLY recommend you either upgrade to the LIVE help function OR  seek local professional assistance so you get this tricky situation handled correctly.