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