Sale of a property for a Like kind exchange (8824 generated properly but how to enter the sale completely)

[nirbhee]

Hi,

With this process I believe TT counts time period before exchange for current year twice for depreciation (for the assets which are part of the exchange). 

Two amounts come from -

- current year depreciation amount for the old property asset 

- current year depreciation amount for the new asset with the exact same information as the property given up with a new name, but with the same date placed in service as the old property (asset was the part of the exchange)

I'll try to illustrate with a made-up example :

Assume no buy up/added cash.

Following the instructions -

"Continue to the screen 'Confirm Your Prior Depreciation'  

• The amount displayed is only for prior years and does not include the current year. 
• Continue until you see the current year amount displayed and make a note to add the two amounts together for the Section 1031 like kind exchange."

Prior year depreciation(for 7 years, yearly depreciation of $3000) : $21000

Current year depreciation with the old asset (for one month) : $250

Total of two amounts for Section 1031 like kind exchange : $21250

Later on following the instructions after finishing like-kind exchange  -

"Go back to your rental activity and then enter the new assets with the exact same information as the property given up with a new name, but with the same date placed in service as the old property, for all assets that are part of the exchange."

Current year depreciation from the new assets with same date placed in service as the old property  : $3000

After this, on Sch E total depreciation for current year for th eproperty is : $250 (from old asset) + $3000 (from new asset with same date placed in service as the old property) = $3250

Isn't $3250 incorrect? Shouldn't depreciation be $3000? 

Seems like for the time period old property was owned, its depreciated twice.

Once with the old asset, and once with the new asset (created with exactly the same information as the old property).

Or maybe its ok?

Thanks!

[DaveF1006]

No that is incorrect. Since your gain from the old property was deferred, it is added as a depreciable basis along with the new property. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.   Please read this for further information.

@nirbhee 

[nirbhee]

@DaveF1006 @DianeW777 

I understand relaized gain from this sale and any future gain would be subject to taxes. Sorry, I am confused about addition of gain as a depreciable basis. 

I created a new asset entry as advised on this thread before,  my question was following that, depreciation for 2022 seems to have depreciated for month of Jan twice  (463 in the table example below, property was sold on 1st Feb). Its counted twice once with old entry and once with new. 

asset1 is the original asset entered with old property, asset1_exchange is new I created now, with exactly the same dates and information as asset1. 

- @DianeW777 How should I correct 463 counted twice here?

- @DaveF1006 Am I supposed to add realized gain of $115,354 to the asset1_exchange? That doesn't seem right at all. 

Thanks for your help!

Realized gain	$115,354
Recognized gain	$104

	cost	depreciation taken in previous years	depreciation for 2022
asset1	101,962.00	22,093.00	463
asset1_exchange	101,962.00	22,093.00	3708

[AmyC]

Let's back up. I don't know the recovery period or depreciation method for either property. Those factor in to how to handle the new property if using the two schedule  depreciation option.

Let's start with the basis of the new property.

Example:

• Buy building A, original cost $250,000, depreciated $150,000, sold $400,000
• if sold, A would have gain of $300,000 but instead did a 1031 exchange.
• Buy building B for $500,000.
• Cost basis for new property B is $500,000 -  prop A gain $300,000 = $200,000

There are two ways to handle depreciation after a 1031. Turbo Tax only handles one method, the single schedule depreciation. It is simple, you take your new adjusted basis, begin depreciation fresh on the new property based on the type of property.

Take a look at the Journal of Accountancy article here for other issues.

[nirbhee]

Thanks @AmyC .

If TT handles only single schedule depreciation, how would you enter the new adjusted basis in TT for depreciation.

- Do I create a new property profile for bulding B as a new rental property address etc and add a new asset with basis $200,000 for depreciation? What happens to bulding A property profile in TT in this case, would it disappear automatically in 2023 return since its marked as sold ?

- OR  Do I create a new asset in the building A rental property profile?

Thanks!

[AmyC]

I believe in simplicity and an easy path for tracing. 1. Yes, dispose of the old property, since you did sell it. Enter the new property, since you bought it. The basis is whatever happened in the 1031 and prior depreciation as cited in my example above.

The new building should be depreciated in the manner that suits it, 27.5 or 39 years, rental or commercial.

2. Yes, the property should be gone for 2023. Be sure to save all your files. Turbo Tax only keeps them a while and you will need your tax records until 3 years after you sell the new building or if you do another 1031, 3 years after you sell that building. You may have this tax return a very long time!

Be sure to view all your forms and see that the old asset is disposed of with no gain while the new  property is in place along with depreciation on the new basis rather than the purchase price.

View/Print:

Desktop: switch to Forms Mode

Online: You may need to go ahead and pay for the return so you can see the actual forms. To do this:

1. look on the left sidebar, 
2. select tools
3. select print center
4. select pay now
5. Select Print, save or preview this year's return

[nirbhee]

@AmyC , Thanks!

IChecked new property is in place with the new basis (same basis also on line 25 on Form 8824). Thanks for the pointers.

1) I have passive loss carryover from 2021 taxes (loss from operating the rental property).

Passive loss carryover from 2021 return = -10,000

Operating Loss in 2022 (before old property was sold in 2022) = -1400

Total passive loss caryover from old property = -11400

I added this passive loss carryover -11400 to the new property entry for 2022.

I believe total passive loss carryover would move from old to new property, seems correct?

2) I sold the old property on 2/1 and acquired new property on 03/25. There is around a month gap within relinquishing the property and purchasing the new property.

Depreciation schedule for the new property with the new basis starts on 03/25.

I don't need to do anything special for that one month, currect?

3) My old property had cost of land accounted for in the basis. The new property does not have any land (apartment).

Since this is a single schedule depreciation, new basis should depreciate as it suits the new property, so no land cost should transfer from the old property, correct?

Thanks!

[AmyC]

1. Yes, the carryover moves.

2. Hopefully you went through a 1031 agent to do all the paperwork correctly. A purchase and sale does not an exchange make. Like-Kind Exchanges Under IRC Section 1031 - IRS states: 

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction).

3. You paid for the land from the old property and any gain or loss would be added to the basis of the new property despite not having land. You will not do a sch D for sale of land, it goes into the new property.

You are welcome!

[nirbhee]

@AmyC Thank you for the nth time !!

Yes, I did use an intermediary 1031 agent for the exchange.

I apologize, I realized I had the land part incorrect.

A follow on ques (In case you are still around to tolerate me :), else is cool too!!)

Using your example, cost basis for new property B is $200,000.

My "new property" is a DST, I own a small percentage of a multi-family complex, lets say 0.2%.

In their balance sheet of DST, they have classification of assets listed, as an example : 

PROPERTY PLANT AND EQUIPMENT
Land                                                                 3,800,000.00
Building                                                          46,000,000.00
Building Improvements - Other                 71,000.00
Building Improvements - Other CM          3,000.00
Real Property (5 Year)                                   10,000,000.00
Real Property (15 Year)                                 3,000,000.00

1) Do I depreciate new basis of $200,000 by itself without any more complexity, and completely ignoring above ?

2) Or do I need to calculate land (0.2% of land value) and similarly segregate all of these (multiplying each by 0.2%).

For simplicity I would do 1) if its not the wrong thing to do. 

After going through numerous articles and irs publication only info for DST I could find was : 

"Since the deduction for depreciation is based on each individual owner’s tax basis because of the deferral of gain under the Sec. 1031 exchange, the DST does not provide depreciation deductible by the DST owners. The DST may, however, provide the percentage of the classification of assets for depreciation purposes such as land, building, land improvements and personal property". 

It would appear to me that 1) is the way to go. 

[AmyC]

Yes, option 1. You traded into a DST and know the price you paid. Then you are correct with the new basis from purchase price and the gain we discussed earlier from the prior property. 

The DST ownership you have is your share of the entire trust for their math.

[MikeP3]

I believe your instructions are while on the step by step. However i do ever see the screen u show at end titled “Are Any Other Property Sales” I usually just go to forms to fill out. The first item on that is to Elect Outof REGS Under SEC 1.168(i)-6(i)

Yes - you treat replacement property as a single asset

No - you split replacement asset into Exchanged Basis and an Excess Basis

Putting in sales info creates gains and losses on TT. Your idea helps by not putting in sales info since TT does not ask about a exchange so it auto calc the gains and losses. I think one elects “No” above, then fills out 1031 Exchange form 8824, gets total basis of like kind property, depreciation like you noted just for info and thats all, then add any Excess Basis as an asset to the rental that was relinguished, change the title to the new asset. Combine rent income and expenses of the relinguished and replacement properties on the renamed rental property. 

Dont know why TT cant program this exchange to be a simple check “Like Kind Exchange” get info to create new replacement property and requished property finishes current year and is not transferred the next year and any deferred losses are transferred to Replacement Property

Mike

[MikeP3]

AmyC

Only thing I don’t get is how does one dispose of relinguished asset without producing a gain as TT asks for sale price, expense, etc The form 8824 comes up with what new exchanged property cost is in order to set it up (this includes the relinguished property cost basis at time of sake.

Please advise and if on step by step or forms use.

Thank you

[tagteam]

If you are not going to continue depreciating the relinquished property, then you have to convert it to personal use in the program.

[MikeP3]

Thank ,i will check that. Or is it better to continue the relinguished property and change name to relinguished Property with life, rate etc staying the same. Then add a new asset call it Replacement Property using the difference from Form 8824 and the Basis on the relinguished Property that you calculated as the cost with the life of 27.5 if residential. This way one keeps some history. Thank you

[tagteam]

How are you handling the exchange?

You would continue depreciating the old asset unless you elect out of the like-kind exchange rule.