1031 Exchange using 8824 Summary Smart Worksheet entering FMV market value help

[niubi]

1. Basis: The adjusted cost basis in the property being relinquished (with improvements) is $125,000 (cash buy price) + $716 escrow fees, and $16,252 has been taken in depreciation over about a 12-year period. 

2. Relinquished Property:  The relinquished property contract price is $539,000 with no debt to pay off at settlement.  Exchange expenses are $27,280 and proceeds in the amount of $510,619 are placed in a qualified escrow account by the qualified intermediary.

3. Replacement Property: The replacement property was purchased for $530,000 using all available funds from the exchange escrow account (less intermediary account fee) of $509,370. The remaining balance difference being made with cash payment.  Exchange expenses were $2,140.    

Hi, I am currently stuck on Line L of the Summary Smart Worksheet.  It’s throwing an error on Line L ‘Cash received’, stating ‘cash rep’d must be no less than the difference between the total value of items given up($539,00) and total value of non-cash items received($530,000).  I think the software is trying to say that the replacement property must be equal or greater according to the 1031 exchange rules.  Should I factor in the selling fees and revise the FMV of the like-kind property given up (Line G) to $510,619?

Please advise and thanks in advance!

Reference Instructions used:

https://accountants.intuit.com/support/en-us/help-article/form-8824/completing-like-kind-exchange-10...

[KimberW]

The instructions you linked to are from one of our professional software products -- not intended for use with TurboTax.

A better link to get to the right portion of the interview screens is here: Where do I enter a like-kind or Section 1031 exchange (Form 8824)?  If you are using TurboTax Desktop, you can search for topics by clicking on the Help menu option and choosing TurboTax Help Center -- or just by pressing F1. Type "like kind" and hit Enter (or Return, if on a Mac).

The option to start the like-kind exchange interview screens is the second-to-last item on the list. You can walk through the interview screens and refer to in-app help along the way.

However -- you'll still end up with the same question that you asked: What to do when the replacement property in a 1031 exchange it worth less than the property you are relinquishing? 

One of the basic rules of a 1031 exchange is that the value of the property that you receive (the new or replacement property) must be at least as much as the value of the property being relinquished. If you give up a property worth $125,000 and you get a property worth $120,000 -- then the "missing" $5,000 must be accounted for. In your case, it will reduce the basis calculated for the new property. Depending on other answers, it could result in having to recognize gain on the difference.

If you were answering questions in Step-by-Step mode instead of directly in Forms mode, you would see that the description for that entry field that is showing an error reads: Cash received (include cash used for exchange expenses and not directly received). The following screen in the interview mode will ask you for the exchange expenses. These are specifically entered here, not used to adjust the fair market value of either property.

The difference in the FMVs (that is -- the "missing" cash that you "received") will reduce the exchange expenses by the same amount. Because your expenses are higher than the decrease in FMV between the properties, there will still be no taxable impact on this exchange. (You would have to recognize partial gain if your exchange expenses were lower than the difference in FMV between the properties.)

For example:

• Relinquished property: FMV is $125,000; adjusted basis is $75,000
• New property: FMV is $120,000
• Exchange expenses: $10,000

Basis in the new property:

Adjusted basis of old property: 75,000

- reduction in FMV: 5,000

+ exchange expenses: 10,000

= $80,000

[This is divided between Exchanged (Carryover) Basis of $75,000 and Excess (Additional) Basis of $5,000]

I hope this helps -- and recommend that you delete the Form 8824 that you created manually. Use the Jump To function to get to the 1031 interview screens. Or, look for the option in the "Sale of Business Property" topic under the "Less Common Business Situations" category.

[Edited: 7/31/2024 11:46AM PDT] @niubi 

[niubi]

Thanks @KimberW !  I followed your instructions to go through the interview process and it seems to calculate everything correctly.

A few followup questions on adding the replacement property as a new rental property(?):

1. I would like to "opt out" so there is only one property; do I go into the form mode and select Yes "Elect OUT of regs under Sec 1.138(i)-6(i)"?

2.  Is there a guide that walks me through this step by step?  

Thanks again!

[claywallace]

Thanks again for the follow up.  

To clarify an earlier point in your post, the FMV of property received should equal the FMV of property relinquished.  As you have outlined in the facts, there is a difference in FMV of property values of $9K which should have been made up with a cash difference by the seller as their property that you received in the exchange has a lower FMV than the property you gave up.  The selling expenses are accounted for separately and, if used to pay exchange expenses, will not result in boot or taxable gain and can be ignored.  Some of these numbers should therefore be revisted.

Regarding your question on opting out of multi-property depreciation treatment under Sec 1.138(i)-6(i), yes you would scroll down to a checkbox in forms mode to select that you want to make this election.  I am attaching a screen shot from another post to help you locate it in the asset input section of the new property here.  

Keep in mind however the bifurcated depreciation treatment involve cases of EXCESS basis of the replacement property.  In other words, you've traded UP in a 1031 exchange with additional cash or loans etc. and not down by getting a replacement property that is less in FMV than the original property.  (Per your facts above, it appears you traded down and further investigation is required.)  Therefore, depreciation deductions for the excess basis are determined by using the applicable recovery period, depreciation method and convention prescribed under section 168 for the property at the time of replacement.  The original carry over basis is depreciated using the original conventions.  Or you can elect out of the regulations and treat the replacement asset as a new asset.  The election out pathway may result in lower depreciation deductions but for a longer period of time. 

[niubi]

Hi @claywallace and @KimberW ,

Thanks for your input.   From my experience, I believe I traded up technically.  The money that was transferred into the intermediary exchange account was less than the sold price of the relinquished property because I had to pay commission and fees.  The amount of money transferred into the exchange account was about $500,000.  The purchase price of the replacement property was $530,000.  I needed to add about $30,000 in cash to complete the purchase and I think this would be considered a buy-up?      

From what I read, the aggregate value of the replacement property must be equal or greater than the aggregate value of the relinquished property, less the costs associated with the sale of the property such as brokerage fees, attorney fees, title, and escrow.

https://getequity1031.com/blog/understanding-the-five-basic-rules-of-a-1031-exchange-net-selling-pri...

I never received $9000 in cash according to the Turbotax calculations...

Please let me know if this correct or not.  I think I get what you're saying in that the $9000 is pretty much moot since my expense exchanges exceeded that amount.  

Thank you!