FAILED 1031 THAT CROSSES TAX YEARS

[foco]

We sold a single family rental property in mid July 2021 that we purchased in 2015. . We attempted to do a 1031 exchange but weren't able to identify a property until the 11th hour of the 45 day window and in the end the deal did not close due to issues identified during inspection. Our funds were held by the QI until January of 2022. I am trying to use TT Premier to handle the capital gains as an installment to defer that tax til 2022. But it is my understanding that i need to  pay the depreciation recapture for the sale on my 2021 taxes. Turbo tax either wants to include both the gain and the depreciation or neither., I have tried to work through this in multiple ways including completing both the Installment Sale and Like Kind Exchange options. Can anyone tell me if it's possible to do this with the online version of TT?

If i move to the desktop version will i have to re-enter all my data on the rental property that has been in Turbotax since 2015? Does the desktop version use an interview like process or is it the tedium of going through every line on every form required by the IRS (8824, 4794, 6252, Schedule E etc. ) Would i be better off getting the online version of TT that includes live support? Or having TT do all the work including filing. After 2 days of struggling trying to figure out how to make this worI am frustrated and exhausted and I just want to get my taxes filed and paid on time. Thanks for any guidance/insights. 

[Anonymous_]

You can probably use the installment sale rules for this (failed) transaction, but I am sure I would not attempt to enter this transaction into any online version of TurboTax.

You do not have to re-enter all of your data from 2015 if you switch to a desktop version, but I would highly recommend that you either use TurboTax Live or Full Service or have this year's return prepared by a tax professional.

[DavidD66]

I'll start by answering your questions about TurboTax Desktop.  You can save all of your information from TurboTax Onlne as a .tax20XX file and then import in to TurboTax Desktop.  You won't lose any of the information you have entered this year, or your historical information.  As for an interview process like TurboTax Online, Yes, it has one.  It also has a "Forms" view.  This allows you to see, and enter data directly on to the tax forms you are working on, but also the underlying schedules.  This functionality may give you the ability to accomplish what you are trying to do. 

One way you might be able to accomplish what you are trying to do is to split the sale into two transactions.  Sell the structure and the land separately.  Apply a portion of the proceeds to the sale of the structure that results in a gain that covers the depreciation recapture, and then sell the land as an installment sale using the remainder of the proceeds, which should be the remaining gain. 

[foco]

Thanks for the reply. If I were to try the option of splitting the sale could I attribute the bulk of the transaction to the land sale so that the bulk of the gain is deferred to 2022? Or would i need to split it in the same percentages it was split to determine the depreciation schedule? 

[foco]

Thanks for your reply. I will probably try TT Live. I'm concerned that this late in the tax season I won't find a tax professional that will get this done in a timely fashion and will want to file an extension which I would prefer not to do. I feel like I have a good understanding of the laws that govern this transaction but didn't anticipate that this would be so challenging for the  TT program to handle. 

[AmeliesUncle]

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@foco wrote:

But it is my understanding that i need to  pay the depreciation recapture for the sale on my 2021 taxes. Turbo tax either wants to include both the gain and the depreciation or neither.,

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It is unlikely that you have any "recapture" that is required to be reported in the year of the sale.

For real estate, "recapture" is based on depreciation in excess of straight line. 

But almost all real estate depreciation is straight line depreciation, so that results in "Unrecaptured Section 1250 Gain".  That is NOT immediately taxed in the year of the sale of an Installment Sale.

[foco]

Thanks for pointing out that the depreciation that I need to pay is "unrecaptured Sec 1250 GAIN" as opposed to depreciation "recapture".  My assumption regarding the need to pay the tax related to the depreciation stemmed from "warnings"  found on multiple sites related to 1031 exchanges. Given the distinction you have provided I have re-read those sources and realize they all refer to depreciation "recapture" which is  not applicable in my situation as you have pointed out.  Thanks for the clarification.

I would prefer to pay the depreciation gain on my  2021 and the rest of the gain in 2022 but don't see any way to split it up that way without showing some gain in 2021. I also don't believe that the option of showing the sale of land and structures as separate  transactions is an option that is available to me as one respondent suggested.

[RobertB4444]

@foco  Unfortunately the IRS requires all transactions to be reported in the year in which they occur.  Because the 1031 failed the entire transaction occurs in 2021 in your case.  So this is your required year for reporting.

[foco]

Robert-

I don’t believe that is correct as we did not receive the funds until 2022. The 180 day period for the 1031 exchange crossed tax years. 

[Anonymous_ · Accepted solution]

I believe you can use the Section 453 installment sale rules for this transaction (which would defer recognition of the gain to the subsequent year).

[foco]

So far, turbotax live experts have not been able to figure out how to get this transaction properly entered. Once I have a resolution I will attempt to summarize the process for other users. 

[djdego02]

Did you figure it out yet?  I have the same issue.

[foco]

Never was able to. Tried upgrading to  turbo tax Live and they were useless. Didn’t understand the issue or the tax law and I’d spend 20 minutes explaining it to them and then they’d try to transfer me and instead cut me off. Would have to start all over with the next rep. Happened 3 times. I finally gave up and just decided that there was a couple positive things about just paying it this year and that’s what I did. Very simple that way. Just filed it as sale of rental property in 2021.  Good luck! 

[AmeliesUncle]

I thought that once I explained the difference between "recapture" and "unrecaptured Section 1250 gain", that you realized the program was doing it correctly.  Is that not the case?

[foco]

It wasn’t that part that was the problem. It was doing the 1031 as an installment sale.