Are there changes/improvements to 1031 Like Kind Exchanges for 2020?

[edselby]

Last years' posts about this read like a horror story?  Is it improved for 2020?  Can it be done from Premier version or does it require the Business version?

[tagteam]

First of all, TurboTax does not handle 1031 exchanges very well in certain instances, particularly multi-asset exchanges (the latter for which you should consider professional income tax preparation).

Second, the online versions are somewhat deficient in terms of data entry for a 1031 exchange. As a result, for a relatively simple exchange, the desktop versions are recommended (since the desktop versions support "forms mode"). For that purpose, you can use either Premier or Home & Business. 

Finally, I would not expect the 2020 versions to introduce significant improvements (if any at all) for like kind exchanges since they appear to be somewhat rare for those who go the DIY route and prepare their own income tax returns (i.e., the vast majority of those who do a 1031 exchange most likely use an income tax professional to prepare their returns).

[edselby]

Thanks, but I do differ with you a bit.  I have a number of rental properties and do not believe that a simple 1031 Like Kind exchange done in the same tax year is cause for abandoning Turbo Tax.  I have used it very successfully for years and do not need to hire "expert" help with my taxes.  You are my experts and I have always felt that you dealt with my needs very nicely and completely.  You (TT) has a document online the says it has "update for 2020" instructions for IRS Form 8824, but it is wrong!!  There were significant changes made to the timing requirements for a replacement property because of the COVID-19 epidemic and they are not mentioned in that document.  From the number of questions in your database it appears to me that more of your clients are using this feature of the tax laws than you are prepared to admit to.

[edselby]

By the way, I have no idea how this got classified as a State Tax issue since it is primarily a Federal process.

Thanks for the heads up on the desktop versus online versions.  I would otherwise have thought them to be interchangeable.

[Critter-3]

TT is an incomplete program and it will not be fully operational until sometime in January or February for some things like states.   The program will undergo weekly updates as they complete sections ... this happens every year without exception.  

ANY tax software released by any company prior to about January 15 is only released for marketing and market share.  No program is complete and ready to file until the IRS approves their final forms and then individually reviews each program's implementation of the form.  And some tax situations aren't able to be filed until February or March, again mostly due to IRS delays.

Now, it would be better if the updates that were easy to do were done in advance.  But that may not fit the program workflow.  For example, if the MAGI calculation is part of the module or subroutine for form 8606, the programmers may decide not to update any part of the 8606 subroutine until the actual form and instructions for 2020 are released by the IRS and then reprogram the entire module all at once.  

[edselby]

I understand all of that.  I am not trying to file taxes yet, just thinking ahead to decide whether I am going to be able to use Turbo Tax this year when the time comes.  I am just asking whether the tools are going to be in place to allow me to get this done.

There is an article by TurboTax online with very brief instructions for IRS Form 8824 that says that it is updated for Tax Year 2020, but that is quite misleading as it does not begin to mention the changes that were put in place early on for timing considerations during the pandemic.  That just set me to looking harder in order to see if there was going to be a way to use TurboTax this year.

I am getting more comfortable with it now.

[samiller34 · Accepted solution]

I think TT could easily improve on the 1031 form just by making some adjustments to the "Specific Asset Exchanged" page.  Currently, it gives you a list of "real estate assets" to select, which is very nice, but it fails to list the Leasehold Improvement assets, which would also and necessarily be exchanged with the asset.  The LHIs need to be included in the list of assets exchanged, so their basis can be used to calculate the deferred gain.  

[edselby]

Leasehold Improvements in the standard program would be nice, wouldn't it?  I suppose that one can just switch to "Forms" mode and enter the data the way you want it.  Not, of course, until Form 8824 is released and verified for use by the IRS.  Maybe by them TT will have come into this century on this topic???

[rlsilva100]

This year I did a 1031 exchange.  I went round and round and round with it trying to get it to defer the gain.  One thing that I have not gotten it to do is use an asset in the new property to track the original depreciation schedule of the relinquished property.   I was on the phone with TurboTax support for hours.   It seems all they could do was to include the old property basis in the basis for the replacement property so that the new property has only ONE asset.  This forces you to amortize any remaining basis in the old property over the much longer time frame (depending upon your situation) associated with the new asset.   

It is simpler to do that way.  But I am disappointed that with Turbo Tax Support, they either did not understand - or care to implement a method to implement a second asset in the year of a 1031 exchange.   The result is that it won't defer the gain - and simply treat the gain as income in the year of the 1031 exchange.   Otherwise, I have had multiple assets associated with other properties for many years without a problem.   I fail to understand why it is a problem now in the year of a 1031 exchange.  It is not a change in tax law. 

[AmyC]

The tax laws changed in 2018 and affected many areas, including the 1031, see IRS News Aug 2018 and this year saw Like-Kind Exchanges - Real Estate Tax Tips | Internal Revenue Service. You can read the basis information on page 3 of  IRS News Aug 2018. There are a couple of ways to handle the depreciation after the 1031 exchange. Here is a great article explaining the options along with pros and cons.

The program prefers the simplest method and offers only that option. The cost basis of the new property = cost of new property - deferred gain from original property.

@rlsilva100