1031 Exchange for Rental Property: end-to-end question

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@randoodle wrote:

Should I leave this Sales Information section blank, since it was reported in the 1031 like-kind exchange section (Form 8824)?

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Yes. The primary form you prepare for a 1031 exchange is Form 8824. Do not enter any "sales information". 

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@randoodle wrote:

I appreciate any advice on how to enter this information correctly.  It seems a little convoluted.

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It is a LOT convoluted and, frankly, TurboTax does not handle these transactions easily. There is an article you might want to read regarding depreciation (as well as other aspects of an exchange) at the link below.

https://www.fool.com/millionacres/taxes/depreciation/depreciation-after-1031-exchange-how-it-works/

If you are still confused, or have issues, I would recommend contacting phone support (link below) as I have read accounts where they have been able to walk some users through the process of entering the entire transaction in TurboTax.

https://ttlc.intuit.com/community/using-turbotax/help/what-is-the-turbotax-phone-number/00/25632

@Anonymous_ Thanks for the reply.

There were some instructions (More Help) about only reporting the sell date and entering the sales information in the like-kind exchange section.  However, the More Help info and dialog for the sales information were quite separated in the program.  

Thanks for the link from The Motley Fool. 

Once I've figured out what to fill in and not to fill in, I've confirmed TurboTax is calculating everything correctly:

• partial-year depreciation for the old rental property
• partial year depreciation for the new rental property
• deducting remaining loan re-fi charges for the old rental property
• calculating adjusted basis for the new rental property (deferring the gain from the old)

Randy

Hello Randy.  

I'm having the same issue, and can not find any info under more help that addresses this problem.  

Do you know specifically what you did in order for the numbers to populate correctly?

If I put a date of sale in the depreciation section, a 4797 gets generated. 

If I do not put a date, no 4797 is generated, but the depreciation is for the full year.

Thanks,

@Husam22 

The whole process is a bit convoluted with respect to the order of doing things and the answers to the questions.  The help screens are scattered here and there, the information is not in one place.

Here's what I did using Turbotax Premier...

1. First, enter the data for the 1031 Exchange.  This is done under FEDERAL TAXES... Wages & Income... Business Items... Sale of Business Property.  The first question is on "Any Other Property Sales?".  Check the box for like-kind exchanges.  Complete the questions in this section and TurboTax will:
   1. Generate form 8824 for your like-kind exchange
   2. Calculate the Deferred Gain.  This is presented after you answer the questions for the like-kind exchange.
   3. Calculate your New Property Basis.  This is presented after it presents the Deferred Gain.  Write down the New Property Basis as you will need it later.
      
      
2. Now, enter the data for the new rental property.  This is done under FEDERAL TAXES... Rental Properties and Royalties... Rental Properties and Royalties (Sch E).
   1. Under the Property Profile, indicate this is a New property (first year you rented the property).
   2. If the property was not rented all year, indicate the number of days it was rented.
   3. When asked "How did you acquire the property?", select "I acquired this rental through a like-kind exchange."
   4. You are presented with a help screen that basically tells you to go off and do step 1 above.
   5. Complete the Rental Income, Expenses, and Vehicle Expenses sections for the rental.
   6. Complete the Assets/Depreciation section.  Add an Asset for the Rental Real Estate Property.  When you get to the Cost, enter in the Cost Basis of the new property that was calculated back in Step 1 above (you wrote that number down).
   7. When asked More About This Rental Asset, enter the date you first started using the property as a business.  This date is used to pro-rate your depreciation for the current tax year.
      
      
3. Now, enter the data for the old rental property.  This is done under FEDERAL TAXES... Rental Properties and Royalties... Rental Properties and Royalties (Sch E).
   1. Under the Property Profile, you will get to a screen that asks "Do Any of These Situations Apply to This Property?"  Now here comes the tricky part!  You and your realtor may think you sold this property, but you did not - you exchanged it. 

      Do not check the Sold box!!  If you click "Learn More" it will tell you not to check the box if you did a like-kind exchange.  (For my situation, I checked "None of the above".)

   2. If the property was not rented all year, indicate the number of days it was rented.  
   3. Complete the Rental Income, Expenses, and Vehicle Expenses sections for the rental.
   4. Complete the Assets/Depreciation section.  When you get to "Your Property Assets", you will need to edit each asset that is listed.
   5. For each asset listed, answer "Yes" to the question "Did you stop using this asset in 2019?"  You will be asked the date that you stop using the asset (i.e., sold it, that is exchanged it).  This date will be used to:
      • Pro-rate your depreciation for the current year (2019)
      • Deduct all remaining refinancing charges (for refinancing assets)

That should be it.

To summarize the confusion:

1. Enter the like-kind exchange information first to determine your cost basis for the new property.
2. Enter the new property information for the property you bought in the exchange.  Use the calculated cost basis from Step 1 and the date the property was put into service.
3. Enter the old property information.  Technically, the property was not sold, but exchanged.  Do not report it as being sold, but report the dates it was taken out of service.

I hope this helps.  Please let me know if it works for you.

Randy

@Husam22 

I had a longer,  more detailed reply, but it kept getting marked as spam.  Hopefully this shorted version will help.  Here are the steps. 

1. Enter the like-kind exchange information first to determine your cost basis for the new property.  This is under Sale of Business Property (not Sch E).
2. Enter the new property information for the property you bought in the exchange. (Sch E)  Use the calculated cost basis from Step 1 and the date the property was put into service.
3. Enter the old property information.  Technically, the property was not sold, but exchanged. 

   Do not report it as being sold

   , but report the dates it was taken out of service.

Randy

Thanks for the detailed response Randy!  

It looks like I got it to work properly with your instructions. 

One mistake worth noting that I was also making would fall under the third step you mentioned - regarding the data for the relinquished rental property.   

After your step 5 (in section 3), when asked: "Did you stop using this asset in 2019?"  After answering Yes, the next question asks about the date of Sale or Disposition.  I put the correct dates.

The next question after that asks about Special Handling;  No

Subsequent question; Home Sale - No

Then we arrive at Sales Information.  If I put in any info regarding the Asset Sales Price, Asset Sales Expense, Land Sales Price, or Land Sale Expenses - a form 4797 is generated.

Hence, I would have to leave them all at 0 for everything to work out.  And that makes sense because the property was exchanged - not Sold! 

Thanks again!  

@Husam22 

It looks like they "un-spammed" my detailed response.  (I did ask them to do that and they did!)

I'm glad it helped you to workout your numbers correctly.

For the relinquished property, when it asks you about Disposition Information, the "Learn More" section has a vague clue about entering sales information later in the "Sale of Business Property" section.  I wish it would have said "all sales information".  

Since TurboTax Premier is designed for rental properties, you would think there would be a question like "Did  you dispose of this property through a like-kind exchange?"  If you answer YES, then skip over the sales information questions for Sch E.  It is counter-intuitive to answer that the property was not sold and not report the sales information in the Sch E sections.

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@randoodle wrote:

Since TurboTax Premier is designed for rental properties, you would think there would be a question like "Did  you dispose of this property through a like-kind exchange?"  

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You can actually link your rental asset information (if it exists in the Rentals section) to the data you enter in the 1031 (8824) section, but it does not appear to work very well. I suspect that might be the result of incomplete programming (TurboTax and ProSeries are similar and it appears as if these transactions are actually easier to enter into the professional software, but manual adjustments are typically required on the forms for certain, more involved, transactions).

Thanks folks! I came very close to figuring out how to file for 1031 exchange after reading this thread. However, I still have one question left regarding the depreciation. @Anonymous_ mentioned earlier about https://www.fool.com/millionacres/taxes/depreciation/depreciation-after-1031-exchange-how-it-works/, which is also what I found earlier.

The question is, how can I actually file the two-schedule (exchanged basis vs. excessive basis) depreciation in TurboTax (I use Home & Business)?

@randoodle, your instructions above seem to treat the replacement property as a new property (option 2 in the link). For that, you need to make an election out. How do I make that election in TurboTax if I choose that option?

That makes sense to use the new basis (as a result of the deferred gain) as the cost of the new property so you don't have to go back and find it someday if/when you sell AS long as this doesn't mess up the depreciation schedules which would have to be based on the actual price you paid for the property.  No-one mentioned this, but in case you are selling one property for example and purchasing say 3, I am lumping the 3 together as one for the form 8824, and splitting up the new basis by percentage to the new properties.  I'll try this approach and if it doesn't work I'll update this thread.

@Vic_R You can lump them all together. But, if you decide to sell one, you will have to split them up Sometimes a little extra work at the beginning is worth it later.You listed all the properties for the exchange in the 1031 paperwork. All of the exchange paperwork is completed first. When you go to the schedule E, you can split them up with their individual basis - if desired.

@erictt 

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@randoodle, your instructions above seem to treat the replacement property as a new property (option 2 in the link). For that, you need to make an election out. How do I make that election in TurboTax if I choose that option?

 

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Yes.  The replacement property is treated as a new property, except:

1. You indicate that you acquired it as a like-kind exchange rather than buying it new.
2. You use the exchanged basis for the new property when you enter it as an asset.

I'm not sure how to enter the data if you do an election out.

That's what I have always done, but I have not used the new "carry forward basis" to calculate the depreciation on the replacement property.  In years past, Turbo Tax said to print out the 8824 for your records so that someday when you sell the replacement property you would have the "adjusted basis" to use when calculating the gain.  If I use the new basis for the replacement property, my depreciation is wipe out, and that is one of the major advantages to owing rental properties, and someday when I go to sell I would have to recapture that in the gain (using the basis from the last exchange) and possibly defer that in the next exchange as long as the numbers work.  For example, property cost $180K, but the adjusted basis resulting from the exchange deferment is $42K.  For simple purposes say the structure is $140K (78%) and would be depreciated over 27.5 years, or $5,091/yr.  If I use $42K as the cost the annual depreciation would drop to $1,191; obviously a huge difference.

This is consistent with the instructions under "learn more" when entering the cost.

Disclaimer: I'm just a TurboTax user, not a tax professional. Please correct me if I said anything wrong.

First, I'm glad to report I found how to file the two-schedule depreciation (as well as how to elect out of it). Follow the instructions in https://proconnect.intuit.com/community/help-articles/help/1040-completing-a-like-kind-exchange-of-business-property-1031/00/5827 (it's pretty hard to find!).

Once you've input the numbers for the exchanged basis as an asset in the "Asset Entry Worksheet", double check the "Asset Life History". It should show a shortened depreciation schedule as the early years of the depreciation has already happened when you held the relinquished property. On the other hand, the excess basis should have a full 27.5-year depreciation schedule spanning 29 years.

Second, why is the two-schedule depreciation better than the simpler alternative? Because it's more accelerated (due to the shortened schedule)! Moreover, my replacement property has a lower building cost (and higher land value) than the relinquished property. Doing the two-schedule depreciation allows me to continue depreciating the previous higher building cost. My excess basis, which isn't much, is all land value after adjustment. I still allocated $1 of it to the building cost so I have a 27.5-year depreciation schedule averaging $0 per year on record. If someone thinks this should be done differently, please let me know!

@Vic_R, when you say "adjusted basis", do you actually mean Line 25 (Basis of like-kind property received) on Form 8824? That is the "new basis" of your replacement property (and the sum of the exchanged basis and excess basis if you use the two-schedule depreciation). In your example, I don't think you can depreciate $140K. You can only depreciate the building portion (with a reasonable way to allocate it, e.g. 78%) of the $42K new basis. That's the way I understand the depreciation rules. Is this not consistent with what you read?

@erictt 

Yes that is what I meant: sorry trying to find the right language is challenging.  Assuming you are referring to breaking up the improved value into the structure (27.5 years), landscape improvements (Landscaping, driveway, etc 15 yr), appliances/carpet, etc.  Yes absolutely this is done to accelerate the depreciation and shelter income.  When I have done this before I just add assets to depreciate and the total adds up to the total improved value, which I calculate using the percentages from the assessors office.  Most don't hold a property long enough to ever fully depreciate the structure, and depreciation is a non-cash write that shelters income, which is huge!  

@erictt why is my response getting chopped up and shortened?

@erictt  I'll try to respond again.  Yes in that context I referred to the "new basis after the deferment by "adjusted basis" which I understand was a poor choice of words.

Regarding splitting up the improved portion of the property's value, yes I typically split this up to the structure, landscaping improvements, appliances, carpet, etc. and typically for items less than a certain amount you can take the entire depreciation as a one time deduction that year, and that of course depends on your own financial situation and strategy.

Regarding using the "new cost basis" from 8824 for the replacement properties yes that does appear to be consistent with the instructions and Pub 527, but I still want to double check with an expert to see if there is any alternate strategy as I hate to reduce the depreciation on the new properties by such a huge amount.  I had thought this only came into play later when you sold and used it to calculate your gain at that point which yes would continue to grow as you recapture all that depreciation, but as long as you are moving up and the numbers make sense I don't see the harm.

@AmyC Following up.  I split the "new basis" (calculated on Form 8824) for the replacement properties equally based on the percentage to the total price.  From a strategy pov, if this is not required, then it occurs to me that you could carry forward as much of the gain as possible in one property that you plan to keep forever, such as a new rental that you plan to move into some day in the future.

BTW, the standard "rule" that you defer the gain if you move up in SP and debt seems flawed to me.  If you move up in SP and take "too much" new debt then you will receive cash (boot) and pay capitol gains tax which really turns the exchange into a partial exchange.  Note: Form 8824 takes the new debt - old debt and adds that amount to the "adjusted basis", but what if you put a bunch of cash into the property in place of new debt?  I'll have to look again but it seems like 8824 should have an entry for "cash into the exchange".

Thanks,

Victor 

@AmyC @Anonymous_ @Husam22 @erictt 

It seems pretty clear that yes your new depreciation schedules should be based on the new adjusted basis for the replacement property (per line 25 of 8824).  I was just wondering if it has always been this way or a fairly recent change?

I did an exchange back in 2015 and my memory is that Turbo Tax said to print out form 8824 and save it in your records because if you sold the replacement property that is the basis you would use to calculate your gain for that sale.

Thanks,

Victor

The tax laws changed in 2018 and affected many areas, including the 1031, see IRS News Aug 2018 and this year saw Like-Kind Exchanges - Real Estate Tax Tips | Internal ...

For kicks, here are the old  Instructions 8824 (2015) from your last exchange.

I had passive rental loss carryover of about $50,000 in property given up.  In 1031 exchange, where does this loss carryover being included?  Add it to the adjusted basis of OLD property at exchange date?

*Solved* in https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/we-sold-a-rental-property-through-a-like-kind-exchange-we-have-passive-loss-carryover-for-the-sold/00/392249

Q:  Form 8582 Worksheet Allocation of Unallowed Losses lists the passive activity carryover loss with the sold property. How does the passive activity loss carryover get converted to the replacement properties?

A:  When you are the screen "Do any of These Situations apply to This Property?"  you can  make the selection that applies to your situation by marking those that  apply from the list available.

Scroll down to the carryover, when you check the next screen gives you a place to enter the carryover

Thanks to dermel for the answer.

Randy-do you know if you take some cash out of the sale of the first property, but use the majority for the replacement property in a qualified 1031, where you enter that cash out?  and where you calculate the pro-rated depreciation?

thanks,

J

@jasonmhatch1968 

Sorry, I have no experience with that.  Hopefully, someone else who has done that can help you.

Randy