How to COMPLETELY report rental Like Kind Exchange. Form 8824 is understood but how are SOLD property assets treated.

[demitchx]

I am trying to determine how to COMPLETELY report a rental property Like Kind Exchange. A property is SOLD, the Exchange is done, the gain on the land and building are deferred but what about the remaing depreciable assets on the relinquished property? Are they reported somehow as being sold?

1. We sold our single family rental property this year using the "Like Kind Exchange" option to purchase another single family property that cost more. In the same year, we  made renovations that we would like to deduct. Would these improvements such as new kitchen counters, appliances and flooring be listed as assets for depreciation or would some other method be used to report the deductions?

2. Form 8824 was completed for the Exchange. Next, how are the property assets handled? In TurboTax I listed the building asset as Exchanged so the gain would not be realized this year. There are other assets that have been depreciated such as carpet and a water heater. Are these assets reported as sold and allocated against the building sale portion to calculate any gain?

This is a follow up to the answer from Rick19744 . I'm putting it here because it not clear how else to respond to his answer.

Thank you for this information which you clearly explained un-like many others I read.
 
If you are still following, I would  like to summarize and then ask something more.

Regarding the renovation items. My understanding is that they do not get applied to the property asset sheet but are only added to the property adjusted
basis.

As for original property assets in TurboTax at the:

Your Property Assets screen, I selected Land/Building property for Edit and 2 screens in "Did You Stop Using Asset in 2015" and selected Yes. I answered the

questions up to the Special Handling screen and answered Yes because on that same screen one of the line items says "This asset was used as a trade-in on a

new asset". Also the LEARN MORE help says

"If you trade in business property for similar property, it is considered a like-kind exchange. You report these exchanges under "Property Sales/Installment

Sales."

When you enter the exchange information, TurboTax will figure any gain on the exchange of properties that must be reported this year. We will also determine

the basis you must use for the asset received.To enter this exchange and figure the basis for the asset received, select Topic List in the toolbar at the top of the screen, scroll to the Income category,
Then choose the Other Income topic. When you are finished entering the exchange information, return to this section of the program to enter the asset received in the exchange"

I followed  what TT says but it leads me to a business expense screen which did'nt seem correct in my case. Is this where I would enter data for Like Kind Exchange/8824?

Also very importantly do I repeat the process of indicating I traded each of the property assets?

Hopefully answers to these questions should allow me to reach the end this TurboTax maze.

[Rick19744]

Your facts concern me.  
1) Did you use an intermediary to "park" your property?
2) When you say you "sold...the exchange is done...." Who took possession of the cash when it was sold?

[demitchx]

Thanks for the reply.
We never received the sales funds directly because we used OREXCO as the intermediary.

I did find a TT answer to my first question as follows:

 "Enter the renovations as a new asset:
Since the placed in service date and the sale date are in the same year, TurboTax does not depreciate it.
    Depreciation for the year, for that asset, is zero.
    The asset will be properly reflected on the Income Tax return
    The IRS will not question the sale of an asset but they may question a large expense or deduction."

So, following this advice, I entered the renovation assets and entered them as sold on the same date the property was sold. The result produced zero depreciation and calculated the allocated gain for each asset. Assuming this is correct, I also entered as Sold the earlier depreciable assets producing gains for those. All the gains were entered in Asset worksheets and on forms 4797. The gain just from these assets are about 57000, so I hope this is correct. If so then my second question is resolved.

3rd question: Something is not clear with form 8824.  How is the above asset gain accounted for.  If it is not, ultimately tax is paid on a lower adjusted basis for the New property.  Am I missing something?
Could it be something to do with the way my allocation was figured? I first calculated the original % Land and Building at 39/61. Then I allocated the building plus remaining assets among the 61%. Since the building only is exchanged, Its allocation never gets adjusted. My adjusted basis used for form 8824 was sum of purchased building value

[demitchx]

plus improvements less depreciation. I hope this makes sense.

[Rick19744 · Accepted solution]

These type of transactions can be difficult.  I will make the following comments:

1.  Properties are of like kind if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties.  It looks like you qualify for a LKE.
2. In general, if you have real and personal property you need to determine exchange groups.
3. Your relinquished property has some personal property and I assume that the replacement property has some as well.  If personal property is "incidental" to a larger exchange of real property (your single family property) it is not treated as a separate exchange group.  Property is incidental to a larger item of property if the property is typically transferred together with the larger item of property and the aggregate FMV of all incidental property does not exceed 15% of the aggregate FMV of the larger item of property.  You will need to make this determination for your transaction.  If your personal property, appliances, etc. fall within this parameter then you only have to address a single LKE transaction.
4. Your renovations, unless they qualify as a repair (not addressed in this discussion), will need to be added to the basis of your current property.
5. If you are able to group your property as one property, then you will now need to determine an overall gain for purposes of the LKE.
6. Here is a link for form 8824 https://www.irs.gov/pub/irs-pdf/f8824.pdf
7. Here is a link for form 8824 instructions https://www.irs.gov/pub/irs-pdf/i8824.pdf
8. You will note in the instructions that you have the ability to leave some lines on the 8824 blank and just attach your own statement if you don't qualify as a single group as noted above.
9. If you do qualify as a single group for exchange purposes, you should not have any recognized gain; everything should be deferred.  If there was no cash involved in the exchange, then keep in mind that your basis in the replacement property is the same as your relinquished property regardless of its FMV.

[UT1470]

Your answer provides the IRS form and instructions.  But how do you get Turbo Tax to take you to the 8824.  All I get after marking Like Kind exchange is a screen that shows Copy 1  edit or delete.  If I choose edit, it takes me back to the rental property I sold.  I'd like Turbo Tax to actually fill out the form 8824 and provide better instructions on how to get the program to generate the form when trading in a rental for real estate.

[MarilynG1]

@UT1470 TurboTax is generating the form 8824 for you.  If you are using TurboTax Online, once you pay for your return, you can see all the forms and worksheets and review the calculations.

To actually look at (or enter directly on) forms, you need the desktop product.

Click this link for info on Entering a Like Kind Exchange.

This article on IRS Form 8824 may be helpful. 

[ashutoshsharmaindia]

I am getting no help from Turbotax regarding this. Talked to few tax experts and CPA from turbotax.

I sold one property and bought two replacement via 1031 exchange via QI. I was asked to combine both the replacement property. One of the property, during the last 5 years - 6 months it was our primary residence. Due to that IRS clearly states that we will get partial exemption. But Turbo tax told us to get the taxes done from outside as it's not possible to do all this.

IRS clearly states this:

 (contains worksheet to figure partial exclusion)

But not getting any help from Turbotax

[Critter-3]

This is nothing the TT program will do automatically so either you will have to use the downloaded program on your own and make direct form entries using the FORMS mode   OR   you will have to employ a local tax pro or upgrade to one of the LIVE options in the Online program  where the returns are done for you (not just help you do your own).  

[ashutoshsharmaindia]

Thanks for your response.

If i override the forms then turbo tax has issues in terms of reviewing and may be e-filing and I am fine with that as I can always do a paper file.

Can i add more forms - I know i can do if i am doing paper filing but what if I want to e-file - can i add forms?

[Critter-3]

If you make overriding entries in the FORMS mode it will void the accuracy guarantee and may keep you from efiling.  You can always attach more forms/schedules/statements to a mailed in return which is why you usually have to paper file. 

[mckannont]

I have a congruent situation. This question is a follow-on for more detail and clarification.

We have completed a 1031 exchange of one Schedule C vacation rental property for another using Reality Exchange, Inc as the intermediary. My issue is how to document the exchange for tax year 2022. I am using TurboTax Home and Business.

The personal property is not significant, inconsequential. It was transferred for $1 under a separate contract. There were many repairs and "improvements" made in 2022 that fall under the de minimis safe harbor rules -- no problem documenting and entering those in TTH&B. There are several assets not fully depreciated and subject to Section 179 recapture, again, not a problem with documentation and TTH&B. However, four larger improvements were made in 2022 (carpet replacement, LVP flooring, a new water heater and replacement of the refrigerator that failed after the property came under contract) that must be included. I believe that since all of these items have been installed in the house, they are intrinsically part of the like-kind exchange and can be grouped together.

I read one thread that suggested entering the items as separate assets, then allocating the sales price across the house plus the four other entries. This option reduces the exchange basis and doesn't reflect the actual transaction. Another suggestion was to make the four separate asset entries but assign a $1 sales price to each which also doesn't reflect the actual transaction and results in four large short-term losses and tax consequences I not yet fully comprehended. It almost certainly would include an invitation to an audit.

I believe this thread suggests the correct approach, but, unless I'm missing something, it appears that TTH&B doesn't provide support to implement it automatically by grouping the like-kind assets for the exchange, i.e., the Form 8824 must be completed manually which most likely requires filing on paper.

Can anyone shed some more light on this process and how best to execute it? Specifically, how to best document the four improvements and group them together on Form 8824, either within TTH&B or otherwise.

Appreciate your help.

[ashutoshsharmaindia]

I didn't like the very excuse from TT telling me to get it done from outside. Outside people were not smart either. Finally filed a complaint to Attorney General of California(Intuit's headquarters). Got their office of president working with me to get it all fixed.

I combined my replacement properties into one for this purpose as Turbo tax don't have the provision to enter it as two separate replacement property. I am able to get partial exemption for my 6 months of stay out of the last 5 years also.

I don't know how good my return it, want to use the full service of some other CPA as I am not very confident in terms of what I have is correct or not?

I don't like the very idea of combining two replacement properties as it will give me trouble in future. I have plan to do another 1031 exchange on the 2nd property in 2024 while the first replacement property I will keep it for longer term. Then how it will be done? There is very less guidance on 1031 exchange to do it via turbo tax. 

1031 exchange itself was stressful(plus loss making for me in 2022) and now to file the tax return for that is so much problematic.

[balu1]

Don't waste your time to try using Turbo tax for 1031 exchanges its a half baked module.

and does not work  correctly when creating forms 8824 or 3840 because if you add more than the exchange than one replacement property,  it produces haywire results. Also, there is no provision to handle  additional funds injected in the exchange process.

The CA form 3840 is also a joke if you replenish more than one property for 1 replaced property.  Its much easier to follow the IRS instruction to produce the 8824 and the CA board instruction for 3840, and just substitute these forms in the package that you mail to the respective TAX departments.

[ashutoshsharmaindia]

100% agree with you. I finally reached out to local Tax lawfirm. Used their resources. I was not convinced that whatever TT produced for 8824 and how it reported - is good enough. 

My biggest frustration is that TT gave me "N" answers for my question.