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I plan to sell my investment property and purchase two other smaller investment properties with proceeds from this sale. What can I do to avoid the capital gains taxes?

I’ve not lived in this property for 23 years. How can I do a 1031 swap?
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DianeW777
Expert Alumni

I plan to sell my investment property and purchase two other smaller investment properties with proceeds from this sale. What can I do to avoid the capital gains taxes?

First here is information about how you handle the assets before and after the exchange.

 

To be clear, you continue the depreciation as though there was no trade. Then with any extra cash that was paid for the replacement property (the property received in the exchange) you set up a new asset and begin depreciation in 2022 as residential rental property using 27.5 year recovery period (depreciation method).

 

If you buy up in your exchange (your New Property cost more than you sold your Old for), the answer is easy – you treat the additional cash 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 a capital improvement, placed in service in 2022.

 

Here are some notes and steps that may make the process easier for you to complete your 1031 exchange.  

  • You should indicate it was rented all year just like you never gave it up. (You may want to return to the original asset(s) to rename it.)

The new property is treated like it was the old property, in other words nothing changes except that you may have a new asset to place in service (add as a new asset) for any buy up/added cash on the exchange.  Below are instructions that should help you complete the process and/or review your own steps.

 

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

  1. First use the Search (upper right) > Type rentals > Press enter > Click on the Jump to... link
  2. Or Wages & Income Rental Properties and Royalties > Update > Continue to Rental and Royalty SummaryEdit the property
  3. Scroll to Assets/Depreciation  > Click Update > Select 'Edit' next to each asset
  4. Edit beside each asset > Continue to the Tell Us About This Rental Asset
  5. Select the checkbox beside 'This item was sold, retired, .... traded in ....etc. > enter the date it was traded (sold/retired)
    1. 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.
  6. Answer the question about whether it was 100% business > Enter the date it was placed in service (may be purchase date or later depending on your circumstances)
  7. 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.

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

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

If you marked the original assets as sold, traded, etc (see 6. 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.

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