1031 Exchange Across 2 Tax Years - Acquired Property

[Barry_C]

I recently completed a 1031 exchange that began in 2023 and was completed in 2024. The relinquished property, a 30-year rental, was sold on 10/31/2023, and the acquired property completed closing on 01/05/2024, all within the required deadlines and using a third-party 1031 intermediary.  My 2023 Form 8824 completed correctly.

I have a question now about entering the acquired property in Schedule E for tax year 2024.  Will the purchase price, adjusted basis, and deferred gain automatically transfer from my 2023 Form 8824? Or do I have to enter these manually? Also, for depreciation purposes of the newly acquired property, do I use my adjusted basis?

Thanks!

Barry C

[MaryK4]

The information from the 8824 does not automatically transfer in TurboTax.  You will have to enter the information from the 8824 for the new property in the TurboTax Schedule E interview. 

You will use the adjusted basis for the new depreciation.  Please post again if you have additional questions!  

[Barry_C]

Thanks, that's helpful.  What happens to the deferred gain?  Does that stay in TurboTax when I sell the property sometime in the future?

Barry

[DianeW777]

Yes, it should if all returns are completed through TurboTax. However, my advice would be to keep all of your documentation for your future sale. Keep in mind that the basis of the new property is the same as the property traded with the exception of any additional cash payment and/or capital improvements made to the new property, For your convenience the basic rules are posted below.

The deferred gain will be taxed on a future sale if a section 1031 like kind exchange does not take place or there is boot received.

• Boot: Any property or money you might have received that is unlike property in the exchange would be immediately subject to capital gains tax.

The following guidance is how you enter a 1031 exchange in TurboTax and will provide guidance for the current and new assets for depreciation.

Depreciation Rules:

The basic concept of a 1031 exchange is that the basis of your Old Property rolls over to your New Property. In other words, if you sold your Old Property for $100,000, and bought your New Property for the same, your basis on the New Property would be the same. It makes sense then that your depreciation schedule would be exactly the same, and does not change! In other words, you continue your depreciation calculations as if you still own the Old Property (your acquisition date, cost, previous depreciation taken, and remaining un-depreciated basis remain the same).

If you "bought-up" in your exchange (your New Property cost more than you sold your Old Property), the answer is easy – you treat the buy up 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 construction, for example, of a garage added to an existing house – the cost is the amount of the buy-up; the date you start depreciating it is the date you purchased the new property; and the depreciation method you use is the method most appropriate for that type of property in the year you bought the New Property (regardless of the method you used for the original house). If you think of it this way, then it's easy, even if your property is a large office building or a more complex purchase.

• Where do you enter a like-kind  or Section 1031 exchange?
• IRS Fact Sheet for Section 1031 Exchange
• IRS Instructions for Form 8824

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 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 > Leave the original 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.
8. Answer 'Yes' to Special Handling.

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.