How do I set up different depreciation schedules for my replacement property in 1031 Like Kind Exchange?

[chrisoleary99]

I have real all the many posts on how to enter a Like Kind Exchange in Turbo Tax. I think I have it all working correctly now, my gain is deffered, the cost basis of my replacement property comes from the adjusted cost of the two residential rental properties I relinquished. 

Here are my questions:

1.) In forms view I can see an asset worksheet for the loan fees and the corresponding Form 4562, but

I can't see an asset worksheet that shows the cost basis of the new property and therefore no Form 4562 (I do realize the cost basis for the newly acquired exchanged property comes partly or maybe wholly from the relinquished properties) . Step-by-step view tells me what the cost basis is and the number seems logical. My question is: why no asset worksheet and no Form 4562 for the new property? Did I do something wrong? Can I add one?

2.) useful life for residential rentals is 27.5 years but for commercial properties its 39 years. IRS says I need to change to 39. How do I change it?

3.) I'm thinking of using a cost segregation study to break the improvements into 5 year, 15 year and 39 year buckets. How would I do this in Turbo Tax? (Hence question 1 & 2 above).

Thanks for any help!

Chris

@tagteam @harpermeek692 @Rick19744 @DianeW777 

[tagteam]

@chrisoleary99 You might want to start by reading through the article at the link below (particularly the "bifurcated" section).

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

Please note that TurboTax is not exactly the optimum in terms of tax preparation software for a 1031 exchange.

[chrisoleary99]

Yes, thank you. I understand the accounting. My question is how to make those adjustments in Turbo Tax?

I can't figure out how to do that since I don't see an asset worksheet for the new property and therefore there is no Form 4562.

Chris

[tagteam]

You can add an asset entry worksheet in Forms Mode.

[Rick19744]

TT is designed to handle the vast majority of tax applications that apply to the majority of taxpayers.  Section 1031 transactions are not one of those transactions that taxpayers typically encounter or attempt to do themselves.  As such, as noted by @tagteam, TT may need to be tweaked to get to the result you want.

Based on that, I have the following thoughts and comments:

1. You indicate that "I think I have it all working correctly... the cost basis of my replacement property comes from the adjusted cost of the two residential rental properties I relinquished."  
2. Based on your notation in item 1, how are you seeing this and coming to this conclusion if you don't see any asset worksheet detail, etc.?  
3. Is TT completing a form 8824?  Does this arrive at the correct basis post transaction?
4. I am also attaching an article as I believe it will provide some useful details in determining which depreciation method you want to choose.  The default in TT may not be the result you want, especially if you are considering a cost segregation.
5. I am also concerned with your statement that "IRS says I need to change to 39 [year depreciation]".  Are you saying that you have been using an incorrect method of depreciation on the relinquished properties?  If that is the case, then you have an issue that needs to be addressed by completing a form 3115 to correct the depreciation method issue.
6. Bottom line is you most likely need to make some adjustments in TT depending on which method of depreciation you choose.  This may require you to "sell" the relinquished properties for no gain or loss and start fresh for the replacement property; this assumes you elect the simplified method as noted in the linked article.
7. https://www.thetaxadviser.com/newsletters/2020/mar/deductions-like-kind-exchanges-cost-segregation.h....

[chrisoleary99]

Thank you for your reply. I will answer below according to your numbered responses:

1. & 2. When I am completing the last steps of creating the Like Kind Exchange the Step By Step view shows the calculated gain amount and the calculated basis amount.

3. Yes, TT does create a new 8824 but not a new 4562.

4. Thank you but my questions aren't related to what the proper accounting should be to comply with IRS regs. My questions are how to get TT to make the changes that the IRS says need to be made.

5. No, I have been using the correct depreciation of 27.5 years but I exchanged for a commercial property (which still qualifies as a "Like Kind") and the IRS regs say that the newly acquired property needs to be on a 39 year depreciation schedule. I understand this isn't what the average American does but there are many investors who step up from residential to the commercial world of real estate investing.

6. This is an interesting suggestion. Thanks, I will explore the idea.

7. Thanks, my questions are related to how to utilize TT, not how to do the accounting.

Chris

[Cookie9]

Hi. Were you able to set up the different assets from the cost seg study after your like kind exchange for the replacement property and electing Out of Reg Section 1.168(i)-6(i)?

Did you have to use the Asset ID and link all the assets? Also how did you decide which asset represented the carryover basis versus excess basis? Pro-rata?

And were your able to take bonus depreciation on your entire 5 7 10 etc yr properties bases versus just the excess basis? Thanks