It depends. If you received any boot during the trade there could be taxable gain.
- Boot: Any property or money you might have received that is unlike property in the exchange would be immediately subject to capital gains tax.
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).
Buy-Up Rules:
If you had any 'buy-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.
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.
Step-by-Step-Form 8824:
Complete the like kind exchange, Form 8824 (Section 1031 exchange):
- Use the Search (upper right) > Type like kind > Press enter > Click on the Jump to... link
- Select the checkbox beside 'Any additional like-kind exchanges (section 1031)' > Continue
- Complete the information for the 'Real estate given up' and 'Like-Kind Property Given Up' > Continue
- Name the event > Continue > Complete the information for the 'Like-kind property received'
- If you did not give unlike property in the exchange click 'No' and continue past these screens, if 'Yes' answer the questions.
- Enter any exchange expenses (sales expenses) > Continue to see your deferred gain.
If you marked the original assets as sold, traded, etc 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.
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