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posted Mar 8, 2025 11:20:14 AM

1031 Exchange for Rental Property: end-to-end question involing properties in two states

Hi, I have read many useful posts on this forum.  How ever none touches the case when the 1031 exchange innvolves properties in two states.  Many of the suggestings point to rename the property and ant adding a new one for the replacement property.  However this will mix up the rental income and referred gain for the prior and new state tax report.  I have the following questions:

 

1. How to start the TT return process.  (a) start from setting up the form 8824, or (b) start from the retal income?

 

2. For the old property do I choose of full year rental (even though it is not true) or partial? for the new property, do I start a new rental entry and put the starting date?  Will this have the risk of double reporting of my rental income /loass.

 

3. Where do I enter the costs of 1031 exchange (fees and commissions) ?  On the old property side or the new propety side.  I understand the exchange process defers the gain, so all the expenses should be carried on the new property side for future calculation of the net gain/loss when I sell the property. 

 

4. How to move the basis of old property depression record  to the new one?

 

I am sure that I will have more follow on questions after seeing the responses.  Thanks in advance for your help

 

YungC

 

4. Since my sale gain of the old property was deferred, do I need to report the transaction to the state of the old property?

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1 Replies
Employee Tax Expert
Mar 8, 2025 12:02:10 PM

Your questions are answered below and assumes you traded one property for one property. As far as state is concerned the net rental profit will be divided between each state where the property was located (property 1 and property 2). Look for questions about the income for each state return.

  1. Start in the rental activity for each asset. Use the instructions below.
  2. If you follow the instructions below you will leave the assets in tact with simply changing the name and address of the property (simplest).
  3. For any 'buy-up' this would be considered a new asset set up just like the original rental with a date placed in service of 2024 (first year of depreciation). 
  4. Again, follow the steps to number 5 below assuming you choose to change the name of the asset only (do not mark as sold, traded, etc.
  5. It seems most states do agree with the federal Section 1031 exchange, in which case there is nothing to report until the final property is actually sold. Double check the rules for your states.

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)
    • 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 exchange.
  8. Answer 'Yes' to Special Handling. 

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).