1031 Exchange expenses

[MarilynG1]

It would seem logical to add Sales Expenses for the new property to the Cost Basis of the new property, as mentioned by @AmyC above.

Here's more info on 1031 Exchanges.

@gr3849 

[kashblack1953]

I believe that you are correct, all expenses related to the sale (commissions, escrow etc) plus the qualified intermediary fees should be added to the the basis and depreciated over time.

[oawong]

What was the work around that gave you the correct answers two years ago?  Can you just increase the FMV of the replacement property to include the associated exchange costs?  Or do you have to manually edit line 18 of form 8824 to include the costs?

[Mike9241]

go to business items sale of business property when you go through the 8824 (for 1031 exchange)  it should ask you about exchange expenses. 

as I went through finally there was a page that said "Exchnge expenses" and asked for an amount

[oawong]

I believe the exchange expenses in turbotax refer to the property disposed of (sold) and not the replacement property.

[kashblack1953]

This was back in 2022, so I didn’t have this on the top of my head, so I opened our 2022 return in TurboTax 2022. In our case we had to add some cash for the replacement property, that was entered under “different property received” screen as “cash received”. 
Next screen was “exchange expenses”, here I entered the total expenses of selling the property given up (commission, escrow plus every other hand that was out) plus the qualified intermediary costs. The closing costs we paid on the replacement properties was rolled into their basis.

Hope this makes sense

[oawong]

Not sure i understand correctly.  Seems if you include your expenses for the replacement property under different property received, it would be like you are not only receiving the replacement property but also the cash which would actually lower the basis of the replacement property whereas you actually want to increase the basis by including the closing costs of the replacement property.  Or do you enter it as a negative number since you are actually adding cash to receive the replacement property?

[DianeW777]

Yes, the expenses of the replacement property are added as an asset in the year of the 1031 exchange as a new asset with the same 27.5 year recovery period.  This is called 'buy-up' expense. It does not lower the cost basis of the replacement property. You do not enter it as a negative number, you are putting out extra cash to receive the replacement property. 

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

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).

@oawong 

[oawong]

Thanks.  If I understand correctly, the Like kind exchange new property basis shown in turbotax will not include the expenses associated with the exchange but I can add these expenses to the basis shown in turbotax as if I did an improvement to the property?  So I put the expenses of the replacement property as the FMV of the other property received and for the "cash received"?

[DianeW777]

Yes, you will add a completely new asset labeled in a way that you will remember what it is.  Use the current date placed in service on the day the exchange was complete in 2024, and select residential rental property which will provide a 27.5 year recovery period.

@oawong