like kind exchange

[Jaegerml]

A property was sold for appro $2,000,000 and 4 properties were purchased for $2,100,000.  The 45 day test was met and used an intermediary used so never touched the cash.  Additional $100,000 was needed to purchase the last property.  Performed like kind exchange and the 8824 shows a deferred  gain of approx $1,525,000 - which makes sense.  But when the property is sold (within that specific rental infomation) - it calculates a capital gain of $1,522,000 and tax of $335,000.  How can you have both a deferred gain which  appears proper and a capital gain which does not (that can't can't be correct if a like kind exchange)?  Must be entering something incorrectly somewhere?

[tagteam]

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@Jaegerml wrote:

Must be entering something incorrectly somewhere?

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Did you also report the relinquished property as sold in the Rental Properties and Royalties section of the program. Doing so will calculate a gain on the sale (as well as depreciation recapture).

[DianeW777]

It depends,  If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

• IRS Fact Sheet-1031 Exchange

Provided below is information that may be helpful.

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 Summary > Edit 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.

@Jaegerml 

[Jaegerml]

Still confusing.  Sold one property and purchased 4 new ones.  Treated the old property as sold and TT is showing a capital loss on the property sold or exchanged. 

Sold for $2,000,000 less $100,000 of expenses - net $1,900,000.  Adjusted basis of this property - original cost $500,000 (bldg $425,000 and land $75,000) less depreciation of $125,000 leaves an adjusted basis of $375,000.  SP of $1,900,000 less adjusted basis of $375,000 is the deferred gain - per the 8824 form.  

Entered all of the new properties at their cost #1 $750,000, #2 $750,000, #3 325,000 #4 for $275,000 for a total of $2,100,000 cost vs $1,900,000 net selling price.  Entered each of the new properties in the rental section and indicated they were not purchased but part of a like kind exchange.  

However, if I don't put the selling price of the old asset in the sale of the business property section - TT shows a capital loss on the sale of the land and a portion of the property and then hits the return with passive losses.  This loss should not show up and I don't know how to fix.  

I want the old asset off the books or to stop depreciating - how can I make this happen?  And I need the 4 properties listed separately for future years.  Is the basis of the new properties supposed to equal the deferred gain?  

The instructions above appear to be what was done but the numbers don't work.  

[AmyC]

You want to mark that you stopped renting out the property, not sold it. One way is to mark that you converted it to personal use just to get the depreciation to stop and let the program know it is no longer a rental.

The depreciation will go on the 8824. With 4 properties, you will have to prorate the gain among the 4 properties based on their individual value compared to the total of the 4.

The basis of the new properties includes the deferred gain along with the purchase price.

I am going to assume Property 1 and 2 were both purchased for $750,000. Each property  1 & 2, is $750,000/$2,100,000 or 35.7% of the amount spent. 

The deferred basis for each property would be the old basis of $1,525,000 x 37.5% = $571,875 each. So property 1 would have a basis of $750,000 + $571,875. Property 2 would be the same.

Property 3 & 4 will need their percentage of the new properties calculated and then use that to determine the deferred basis for each. 

Be sure to depreciate each property according to its type, rental or commercial.

Reference: Real Estate Tax Center| IRS

[slvanderheyden]

Thank you so very much for putting it in simple language that the everyday person can understand. I was in tears before I saw your advice. I then cried with joy!  I knew what to do. Diane, you truly are an expert and a blessing! Excellent work!