1031 exchange of rental properties--carry over depreciation to new property?

[JARoberts]

Anyone know how to input the depreciation of the sold property into the new property. I have the schedule from last year so do I just line-item it as carried over depreciation manually into the new properties page? And what specifically from the schedule do I carry over?

[Carl]

For the information and details you seek, please see the thread at https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/does-rental-property-...

[JARoberts]

This explains the need and reasons but not the process within TT and how to apply it.

[tagteam · Accepted solution]

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@JARoberts wrote:

This explains the need and reasons but not the process within TT and how to apply it.

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One issue is TurboTax offers to link a rental property asset that has already been entered with Form 8824 but the procedure really does not seem to work all that well. You will most likely be better off entering the replacement property in the Rental section.

The other issue is there are two ways to deal with depreciation when there is excess basis involved. The following article simplifies the procedure (if it happens to apply to your transaction).

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

[Carl]

Thanks @tagteam While I consider myself well versed somewhat with SCH E matters, when it comes to this 1031 stuff I know just enough to have you thrown in prison for tax fraud. 🙂

[tagteam]

@Carl It is really tough to get these types of transactions entered correctly in TurboTax. The program makes an attempt but it is really sort of half-baked when it comes to how to deal with the replacement property and the excess basis (if any). There is not much anyone can do to ameliorate the situation until the software is programmed for the various options available.

[JARoberts]

The link was very helpful as his example is a simplified version of our transaction. My takeaway based on your comment about TT's half-baked solution and his explanation is that I do have to enter the carried over depreciation and just line item it on TT. Oh joy!

[JARoberts]

So looking at my depreciation schedule this is what my high school (pre-Reagan) accounting brain sees--I have multiple assets to carry over (house+handful of improvements over the years); I need to line item them all since they were done at separate times; I need to subtract the amount already depreciated from the depreciation basis and input those amount then depreciate them for whatever period of time remains from their inception as an asset. Does this sound correct to you? Also do you have any idea whether TT will allow me to change the depreciation time remaining manually or whether I'm going to have to line item them anew every year going forward?

[tagteam]

That procedure sounds correct if you are using the "two-schedule" method outlined but I do not believe you are going to be able to change the recovery period ("depreciation time") manually without doing some sort of override.

You can try various combinations and permutations in Forms Mode as a test, but you will most likely have to override one or more figures (or options). TurboTax just does not really support 1031 exchanges very well and multi-asset exchanges are especially problematic.

[JARoberts]

Interestingly if I line item each asset to carry over and put in the original purchase price and date entered into service (and ticking the none of the above box for how the asset was acquired) it does correctly calculate the previous depreciation amounts. Whether it will manage this going forward for the remainder of the depreciation life will be something to watch. But when opting for a two schedule this perhaps is the work around.

[Think57]

Seems if you are putting in the original "put into service date" in TT for depreciating a carryover asset from the relinquished property, you are double counting the depreciation.  Asset was depreciated for both the relinquished property and the replacement property for the same time period that year.  Am wrestling with which values to put into TT for the carryover'ed asset for the replacement property's depreciation schedule.  Such as For Date Acquired, Date placed in Service, and Total Cost.  Is "Date placed in Service" the original date asset was placed in service for relinquished property or the date the acquired property was closed on ?  Is Total Cost the original cost of the asset, or the remaining basis after being depreciated over the time the relinquished property was held?  Seems these input drive the TT's calculations for Year of Depreciation and Depreciable Basis that then drive amount of depreciation to take for the year.

[JARoberts]

As it was explained to me above and with a CPA (nephew took mercy because he knows it's complicated) you have a choice as to end the depreciation of the relinquished property and start anew when you do an exchange. Or you can carry over the depreciation from the sold property unto the new one. TT doesn't support these choices so my work around was to add the original depreciating items of my relinquished property into the new property but using the original date entered into service and purchase amounts. When I did so TT calculated the depreciation correctly. I did require removing all "evidence" of selling the relinquished house which took some digging.

[Think57]

Thanks JARoberts.  Very nice to chat with someone who has a similar challenge and has gone down the same line of thinking.  Based on your postings and additional research, have decided to do the same as you.  Will carry forward original basis, original date-in-service, original purchase amount, and original asset life to the received properties (exchanged one for two).  To prevent double counting of depreciation for the building over the same time period for 2019, will manually override the calculated depreciated amount for the received properties.  2020 and going forward will be OK.  So if never sold relinquished property, and total depreciation for the year would have been $4,921.  Making sure that the TOTAL depreciation for the SAME ASSET for 2019 ACROSS the relinquished and both received properties does not exceed $4,921.  TT is correctly calculating the relinquished building depreciation for 2019, $3,486, as TT knows when building was sold.  So allocating and pro-rating the remaining building depreciation of $1,435 across the two received properties for 2019.  Relinquished on Sep 3 and received the other two properties on Sept 5.  Thanks again for your postings and response.

[sunm98tt]

Thanks, Think57. I have exactly the same problem on how to carry over the relinquished property depreciation onto the replacement property. I did what you suggested, to enter the original data for the relinquished property. But in doing so, I’m double counting the depreciation for the period from January 1 to the date I acquired the replacement. You mentioned to override the depreciation for the the received property, how do you do it in TT? Thank you for posting, it’s been really helpful.

[DianeW777]

@sunm98tt You are exactly right.  The depreciation amount would be inflated if you added any amount to it and created a new asset.  No overrides will be necessary or need to be tracked for future action if you follow the action plan below.

The depreciation asset for the property given up in the Section 1031 exchange remains the same without change.  It must go forward for the new property as though it is the same real estate (you could rename it).

Any additional cash or funds paid in the exchange, above and beyond the property itself, is another and separate, distinct asset with the recovery period of 27.5 years.

For future tracking and records this is the simplest and most convenient way to move forward after a Section 1031 real estate exchange with the need to keep records of the exchange to show any additional funds paid for the new asset. The new asset will begin the depreciation recovery in the year of the exchange. The asset for the property given up keeps the same character with no changes.

TurboTax can handle this easily and your time factor can be significantly less for your tax return.