1031 exchange when the relinquished property depreciation has not been taken for many years

[atn888]

The relinquished property has 1.1 years of depreciation from filing as rental ONLY in 2009-2010.  There is no (Sch E) exist in TT section "Wage & Income > Rental Property and Royalties ".   I do have 2010 sch E worksheet which has the total depreciation taken.

I have 5 Questions:

Question 1 - Could someone confirm that 1031 exchange is allowed since the property has not been used as primary or secondary or personal use for the past 5 years? 

Question 2 - Could someone confirm that un-claimed allowable depreciation from 2011-2023 is not problematic with the IRS, since depreciation could not be claimed without having FMV rent?

Question 3 - Is it the right approach to 1st start with the Relinquished and Replacement exchange step and then go to the Rental income/expense/depreciation section? 

1st step - Enter the 1031 exchange for relinquished and the replacement property:

I started with "Wage & Income > Business Items > Sale of Business Property > Start" 

1. a) Check "Any additional like-kind exchanges",  then "Add an Exchange"
2. b) Enter gave up property: (HI residential)

• address (HI),
• 12/01/09 = acquired date
• 08/01/24 = date transferred
• 480,000 = adjusted basis (land and building purchased price - total depreciation taken)
• 1,000,000 = FMV of property you gave up (gross or contract sold price)
• 250,000 = mortgage/loans paid off part of the sale
• 20,000 = Total Depreciation taken (additional information for completeness)

1. c) Check "The like-kind property I exchanged was used in a trade, business, or rental"
2. d) Enter like-kind received: (MD DST commercial)

• address (MD)
• 1,050,000 =FMV property received
• 12/01/24 = date received
• 09/01/24 = date identified
• 300,000 = loan assumed

1. e) Click "No" exchange to related party
2. f) Click "No" Different property given up 
3. g) Enter Exchange expense

• 56,000 = sales expenses (tax, fee, attorney, escrow, QI fee)

1. h) TT says - No Taxable Gain

• 464,000 = Deferred Gain 

1. i) TT says - New Property Basis

• 586,000 = New Property Basis 
• 586,000 = Basis of like-kind section 1250

2nd step - Enter depreciation for the Replacement Property:

From "Wages & Income > Rental Properties and Royalties > start > Add an Asset", enter in the Replacement Property

• Mark - Rental Estate Property
• 12/01/24 = Date Purchased (Replacement Property MD)
• Mark - Nonresidential real estate
• 1,050,000 = Cost (Replacement Property MD)
•    105,000 = Cost of land (don't know. Just use 10% same % as the Relinquished property)

Question 4 - In this step, I don't know what I should check?  

1. a) Mark - I traded in an old asset to acquire this one (this is not common) ?  

or 

1. b) Mark - I purchase this asset?

or 

1. c) Mark - None of the above?

Question 5 - If I chose any a), b) or c), I see the same depreciation (1,010). This number does not make sense.  Purchased building (945,000) / 39 / 12 months = 2,019.  Why is it 1,010?  In addition, this seems wrong. I thought the new property (MD) should only account for the capital gain deferred + additional money put in (assumed a higher loan + purchased price is higher than relinquished price).  Please help shed some light to this.

[M-MTax]

I can't help with your TurboTax operational questions and you should contact customer service for those types of questions to get a quick, and hopefully accurate, answer.

The threshold question, for me, is: How was the property being used from 2011-2023? Did it sit vacant? Was it rented part of the time? Was it always available for rent? Was it rented but rented a less than FMV? If so, was it rented to an immediate relative?

Note that the property must have been held for trade or business use (productive use) or for investment in order to qualify for 1031 exchange treatment. If the property was rented to an immediate family member from 2011-2023 at less than FMV, that's going to be a tough sell to convince the IRS that the property qualifies for a 1031 exchange.

[atn888]

Yes I was rented.  Without getting into legal detail, basically 2 unrelated owners (titled as 50/50 tenant in common, unmarried and mortgage in both name) started the short-term rental in 2009-2010.  Income/expense/debt was spitted 50/50, and both filed tax independently.  The other 1/2 owner has control of all the VRBO, PayPal and all the rental accounts.  I was locked out without receiving any rent/document.  Tax filing was overly extended.  Tax was later filed with the rental removed and continue that way till the final court force sell order in 2024.   

[M-MTax]

I'd say you need to consult with local legal counsel due to the (extended) time period involved.

It's understandable that you were "locked out" by the other owner but as far as being locked out for close to 14 years, not so much. Legal action should probably have been taken much sooner and you would be responsible for reporting any tax due, as well as taking expenses, including depreciation, for the time period during which rental operations were ongoing. 

I also am of the opinion that you would qualify for a 1031 exchange based on the new facts you presented (clearly the property was being held for rental use) regardless of the scenario with the other owner. However, you may also be responsible for your share of the depreciation in terms of future recapture. 

This is a complicated scenario, and I strongly suggest you consult with a local tax pro and/or legal counsel.