Property rented 2016-2019, for 2020-21 I just didn't enter it, now how do I claim expenses for 2022? Want to do 1031 exchange

[cindywhitall]

We own a condo, it was purchased as a rental. It was rented from 2016 thru 2019. In 2019 our child moved in and paid below market value rent, basically just covered the taxes and HOA so I figured I couldn't claim the rental expenses. I want to sell it and do a 1031 exchange. I'm unclear if  I had to have rented it for a portion of this year and last to do the 1031 so I was going to claim some rent this year anyway. I don't know how to pick up where I left off in turbo tax with the depreciation.  I didn't claim any expenses or depreciation for 2021-22. Basically I treated it like it was either vacant, or personal use. I just took it off my return completely. Not sure what to do. I really want to keep the 1031  exchange option because the cap gains would also hit my healthcare subsidy! I would probably keep it as a rental if I can't 1031 it. I don't know what to do with my 2022 taxes. One 1031 company (I gave them brief details in email) said this "

. As long as it is not your primary residence, and you have not been using it personally for more than 14 days per year then regardless of income it is qualified as an investment property and eligible for a 1031 exchange." What is considered personal use? If it wasn't rented and we, the owners, didn't live there is that considered vacant? HELP!

[RobertB4444]

As long as your son was not a dependent on your tax return then you have no personal use of the space.  You can classify it as property held for investment and get the depreciation schedule from when you last used it as a rental property for the 1031 exchange company.

If your son was a dependent on your tax return then all of his time there was personal use by you and the house doesn't qualify for a 1031.

@cindywhitall 

[cindywhitall]

Thanks for responding, I'm afraid I have complicated this though...  Son was definitely not a dependent.

I spoke to a 1031 exchange company and the person said that the IRS might ding me for depreciation I DIDN'T take, BUT COULD HAVE ,if I don't do the exchange. She also said that as long as it wasn't my PRIMARY residence that it would still be an investment property and that I didn't have to rent it (which is what you just said.)

I did more reading and apparently she might be correct about the depreciation that I didn't take so I looked back at my taxes and I don't see a schedule E for that property. Now I'm worried that I may have "converted it to personal use."  I read a thread that says this...which I'm afraid I might have done " "I did not rent or attempt to rent this property at all in 2019. If you do, then you'll be FORCED to delete the SCH E. Do that, and you're screwed."

I guess it's 2 questions. Will the IRS ding me for depreciation I didn't take it I don't do a 1031? I don't care about if I can do the 1031, I probably wouldn't bother to go back and add it.

OR will they not ding me for it if I chose the  but say it was personal use and disallow the 1031?

I posted a new question about whether and how I should amend my returns for 2020 and 2021 to put the property back on schedule E. I tried to do it, but there's no option for that property so I don't know if I somehow dropped in in 2019 (which I did claim 6 months of rent) or if the program just isn't seeing it to bring it back.

[AmyC]

1. The IRS will have you subtract depreciation allowed or allowable. However, since the second home, an investment property, was not being rented at fair value, you could not claim expenses, including depreciation.

2. Since this is an investment house, you qualify for the 1031 and will only claim depreciation on the years that it was rented at fair value and depreciation claimed.

3. Once a property is deleted, you have to manually enter all information again. However, there is no need to add the property back and amend the 2021 and 2020 returns if your son was living there independently and paying less than fair market value.

See Like-Kind Exchanges - Real Estate Tax Tips - IRS.

[cindywhitall]

Thank you for taking the time to help. I have so many questions and going down a rabbit hole. This is what I am hoping is correct. It's basically what the 1031 person said, but she warned me about the depreciation. That said, she is not an accountant and doesn't know my whole situation, she probably didn't know I had, apparently, converted it to personal use. I was just trying to learn about 1031. I had read that a personal use property couldn't be used. That term seems to be used here in different ways. In the tax filing way I can't deduct expenses because since it's not rented FMV, it's personal use, which  makes sense. But for 1031 as long as it's not my personal= Primary residence I'm good.

 Another question is whether I need to confirm that I "converted" it in order to avoid the IRS saying I should have depreciated it. Although, from what you said, the mere fact that I didn't claim rent prevents me from claiming deprc. I have read that you can depr vacant property so I'll have to research that some more. Wondering if I should go back and try to claim depr  and expenses to generate a loss to carry forward for when I eventually sell. Not sure that's worth the effort. It may be important to have it in case we can't identify a property for the 1031 within the time limit.

[DianeW777]

Yes. The property can be used in a 1031 exchange because it was not used for personal purposes.

No. You were not entitled to depreciation on the rental condo during the period it was rented at less than fair market value (FMV) there would be no loss to carry over  because expenses would have been limited to the income received (does not go below zero).

When you set up the new property it will retain the same character, as well as the depreciation that was previously used.  The property received is treated exactly like the property you gave up as though there was no exchange. The acquired / placed in service date remains the same, as well as the cost basis.

If you buy up in your exchange (your New Property had more costs to acquire than just your Old Property), 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, placed in service in 2022.

Here are some notes and steps that may make the process easier for you to complete your 1031 exchange.  

• You should indicate it was rented all year just like you never gave it up. 

The new property is treated like it was the old property, in other words nothing changes except that you may have a new asset to place in service (add as a new asset) for any buy up/added cash on the exchange.  Below are instructions that should help you complete the process and/or review your own steps.

When you have your TurboTax return open you can use the following steps to update the original assets for the exchange.

1. First use the Search (upper right) > Type rentals > Press enter > Click on the Jump to... link
2. Or Wages & Income > Rental Properties and Royalties > Update > Continue to Rental and Royalty Summary > Edit the property
3. Scroll to Assets/Depreciation  > Click Update > Select 'Edit' next to each asset
4. Edit beside each asset > Continue to the Tell Us About This Rental Asset
5. Select the checkbox beside 'This item was sold, retired, .... traded in ....etc. > enter the date it was traded (sold/retired)
   1. You can choose not to select this and just change the name of the assets given up in the trade to identify them with the new property. The depreciation for the year will not change on these assets.
6. Answer the question about whether it was 100% business > Enter the date it was placed in service (may be purchase date or later depending on your circumstances)
7. Continue to the screen 'Confirm Your Prior Depreciation'  
   • The amount displayed is only for prior years and does not include the current year. 
   • Continue until you see the current year amount displayed and make a note to add the two amounts together for the Section 1031 like kind exchange.
   • This completes the asset portion of the trade.

Next you will complete the like kind exchange, Form 8824 (Section 1031 exchange):

1. Use the Search (upper right) > Type like kind > Press enter > Click on the Jump to... link
2. Select the checkbox beside 'Any additional like-kind exchanges (section 1031)' > Continue
3. Complete the information for the 'Real estate given up'  and 'Like-Kind Property Given Up' > Continue
4. Name the event > Continue > Complete the information for the 'Like-kind property received'
5. If you did not give unlike property in the exchange click 'No' and  continue past these screens, if 'Yes' answer the questions.
6. Enter any exchange expenses (sales expenses) > Continue to see your deferred gain.

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.