Disposal of Rental Property Assumes a Sale and Generates Form 4797

[moniquescobey]

Hi,

I am trying to dispose of a rental property due to a 1031 exchange.  When you check "yes" to Did you stop using this asset in 2023,  a field is provided for the disposition date. When that is filled in, a sale is assumed and TT generates Form 4797 whether or not you select "Special Handling Required".

How do I dispose of this residential rental asset without generating a taxable sale?

[Carl]

I don't know about 1031 exchanges. However, I do know a "possible" reason you're being asked for sales information after selecting "YES" on the Special Handling Required screen. (I'm not sure with a 1031 exchange, but I think you are correct to select YES on the Special Handling Required screen.)
Before you got to the assets section, towards the beginning of the SCH E section there's a screen in the Property Profile section where you need to select the option for "I sold or disposed of this property in 2023".

Once that's selected, then the section for assets should be titled "Sale of Property/Depreciation". Then when you click YES on the special handling screen, you shouldn't be prompted for sales information.

[Anonymous_]

In the Less Common Business Situations section, look for the Sale of Business Property subsection and click the Update or Continue button.

On the next screen put a checkmark in the box:

[Anonymous_]

You also have a decision to make with respect to how you want to handle depreciation going forward.

See https://www.journalofaccountancy.com/issues/2008/nov/depreciatepropertyinlikekindexchangesconsistent...

and

https://www.thetaxadviser.com/newsletters/2020/mar/deductions-like-kind-exchanges-cost-segregation.h...

[moniquescobey]

So I did go look a the beginning of SCH E like you suggested and I had checked the "I sold or disposed of this property" box. However, when reading the Learn More link, it says not to check this box if you are doing an exchange! Pretty funny as an exchange does involve selling the property so this description is far from intuitive.

However, unchecking the box did not seem to help. When I later go to the asset summary to enter the disposed of date for this property, whether or not I specify special handling,  a taxable sale is generated.  The question remains, how do I dispose of a rental property without having a taxable sale generated? 

[moniquescobey]

Thanks for this. I am able to generate a form properly for the exchange right where you said it was. However, I am unable to dispose of the rental on the sale date. 

Another question, when completing the exchange step by step, I am not sure which activity to attach the exchange to, the one relinquished or the new one?

[Anonymous_]

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@moniquescobey wrote:

.....it says not to check this box if you are doing an exchange! Pretty funny as an exchange does involve selling the property so this description is far from intuitive.

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Uncheck that box in the Property Profile section because you did NOT sell the property; you exchanged it.

[Anonymous_]

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@moniquescobey wrote:

.......However, I am unable to dispose of the rental on the sale date. 

Another question, when completing the exchange step by step, I am not sure which activity to attach the exchange to, the one relinquished or the new one?

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There is no "sale date"; you're did a like kind exchange.

You may also need to use Forms Mode, depending. 

Again, please read through the links provided in one of my previous posts. If you are the least bit uncertain, you might want to seek guidance from a local tax professional as state law may also impact the exchange.

[moniquescobey]

HI,

Thank you for your help.  I no longer have the check box "I have sold or disposed of this property" checked and a sale is no longer generated.   And I have successfully entered my exchange and have read the links you have provided and several other posts in the community and still am having one problem.  The depreciation for the rental property is calculated for the entire year, I don't know how to stop it and have the asset disposed of on the exchange date.

I appears others have reported this problem but I was unable to find what they did to manage this problem. Thank you so much for your time!

[Critter-3]

A 1031 exchange can be confusing and using a DIY program without assistance may not be the wise choice ... upgrade to a live version if you need help.  

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