1031 Exchange - How to treat non-like kind property (incidental personal property such as appliances)

Question

Property given up / Relinquished PropertyDescription: Property A - Multi-Family DuplexDate acquired 10/26/2011Placed in service 12/31/2011Date Removed from Rental market for Renovation 8/24/25 (Both tenants exited the premises)Date sold 11/18/2025 (date recorded in name of new owner) i.e. last full day of ownership 11/17/25Significant Renovation completed between 8/2025 and 11/2025 costingPurchased new incidental personal property (Ovens/Microwaves) part of reno for $2KFair market value (FMV):Gross Sale Value 790K (per contract)Expenses paid to sell property: 51K (Owner title insurance, County tax transfer, Escrow Fee, Buyer/Sell Agent commissions, Qualified Intermediary Fee)Loan Paid Off: 109KProperty received / Replacement PropertyDescription:   Property B - Single Family ResidenceDate acquired 12/23/2025Paced into service 12/23/2025 or 1/1/2026 (TBD)Fair market value (FMV):Gross Purchase Price 740K (per contract)Expenses paid to buy property: 1K (Escrow Fee, Exchange Processing Fee, Recording Service Fee)Incidental personal property included some appliances such as Washer/Dryer and Fridge installed in Aug 2022 (estimated FMV ~3K)Excluded built-ins like stove, hoods, Microwave for 1031 purposes as considered real property per Arizona lawCash paid 112K (out of pocket to QI)1) Wanted to confirm that i have no boot even though i sold a property for 790K and purchased for 740K, the expenses and commissions for the exchange can be used to reduce the net price (no sure if can reduce by both sell and buy expenses  i.e. 790 - 51 - 1 = 738K) hence no boot.  no cash was received in this exchange.  A QI was used to transfer funds.2) How to handle incidental property relinquished for $2K and the ones received with the new unit (Fridge, washer, dryer, etc) for $3K in Form 8824?  given the new tax guidance post BBB and personal property being considered non-like kind.  Seems that F8824 allows you to separate these out3) New Property DepreciationWould like to "elect out" by using Election made under Regs. Sec. 1.168(i)-6(i) to treat new real property as a single asset for depreciation (vs carry old ones and a new line item for excess basis).  Since election is to be made on form 4562 when asset is placed i service, would it better to place in service on 12/23/25 vs 1/1/2026 to get the election made in the same tax year of 2025?

DianeW777 · Accepted Answer

The answers are noted below.

The property was not used for personal purposes and was available for rent, not rented. I would indicate the date of the exchange and that it was rented all year (the depreciation ends on the date of the exchange). During the period of improvements it could still be considered as available for rent if it was still considered available for the next tenant.
Appliances should not be a mystery. Any appliances that stay with the property would be part of the trade. As indicated you will place any new appliances placed in service in 2025 as a new asset for 2025, and will be part of your exchange. Continue to depreciate them as though there was never an exchange. Depreciation continues and maintains the same exactly as if a trade did not occur. As far a splitting them out, you really don't have a choice for any new asset placed in service in 2025. Likewise, any capital improvements in 2025 will be a new asset and part of the trade.

This all coincides with the details posted initially about Section 1031 like-kind exchange above.

Example: Assets after the trade:

First rental house/land stays on depreciation as though there was never a trade (you will rename it)
Any improvements or appliances that were done after the original property was placed in service are going to continue as assets after the trade
Any new improvements or appliances placed in service in 2025, as part of the original property are going to begin with the new property received in the trade as separate assets (or if you choose to add them to any buy-up if applicable).
Buy-up if any will be a new asset placed in service on the date of the trade.

@earth777

DianeW777 · Answer

It appears as though there may be no boot. Use the details here to make the actual determination with your numbers. Here are a few details and entry procedures for your Section 1031 like kind exchange. The property was not really out of service, it was temporarily renovated and then traded. I would not indicate it was removed from service before the trade and that it was rented the entire year. This will save some unwanted steps and it's a reasonable action.

The new appliances added to the old property should be placed in service in 2025, since it was added to the property given up. See the rules below for depreciation. The property received is treated the same as your old property for depreciation.

Depreciation Rules:

The basic concept of a 1031 exchange is that the basis of your Old Property rolls over to your New Property. In other words, if you sold your Old Property for $100,000, and bought your New Property for the same, your basis on the New Property would be the same. It makes sense then that your depreciation schedule would be exactly the same, and does not change! In other words, you continue your depreciation calculations as if you still own the Old Property (your acquisition date, cost, previous depreciation taken, and remaining un-depreciated basis remain the same). Add new assets for any appliances purchased in 2025 for either property.

Buy Up:

If you 'buy up' in your exchange (your New Property cost more than you sold your Old Property), the answer is easy – you treat the buy up part as you would a new addition to an existing property. In other words, you treat the amount of the buy-up the same as you would the cost of construction, for example, of a garage added to an existing house – the cost is the amount of the buy-up; the date you start depreciating it is the date you purchased the new property; and the depreciation method you use is the method most appropriate for that type of property in the year you bought the New Property (regardless of the method you used for the original house). If you think of it this way, then it's easy, even if your property is a large office building or a more complex purchase.

IRS Fact Sheet-Section 1031

When you have your TurboTax return open you can use the following steps to update the original assets for the exchange.

First use the Search (upper right) > Type rentals > Press enter > Click on the Jump to... link
Or Wages & Income > Rental Properties and Royalties > Update > Continue to Rental and Royalty Summary > Edit the property
Scroll to Assets/Depreciation > Click Update > Select 'Edit' next to each asset
Edit beside each asset > Continue to the Tell Us About This Rental Asset
Select the checkbox beside 'This item was sold, retired, .... traded in ....etc. > enter the date it was traded (sold/retired)
- You can choose not to select this and just change the name of the assets given up in the trade to identify them with the new property. The depreciation for the year will not change on these assets.
Answer the question about whether it was 100% business > Leave the original date it was placed in service (may be purchase date or later depending on your circumstances)
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.
- This completes the asset portion of the trade.
Answer 'Yes' to Special Handling.

Next you will complete the like kind exchange, Form 8824 (Section 1031 exchange):

Use the Search (upper right) > Type like kind > Press enter > Click on the Jump to... link
Select the checkbox beside 'Any additional like-kind exchanges (section 1031)' > Continue
Complete the information for the 'Real estate given up' and 'Like-Kind Property Given Up' > Continue
Name the event > Continue > Complete the information for the 'Like-kind property received'
If you did not give unlike property in the exchange click 'No' and continue past these screens, if 'Yes' answer the questions.
Enter any exchange expenses (sales expenses) > Continue to see your deferred gain.

If you marked the original assets as sold, traded, etc (see 5. above) then go back to your rental activity and then enter 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.

Enter a new asset for any buy up/added cash in the exchange including the purchase/selling expenses you paid in the trade. The new asset will begin depreciation on the completion date of the trade/like kind exchange.

These links may be helpful as well:

@earth777