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

[lori58sf]

Hi

though they are all rental, but nature is different.  IRS is very particular re farm.  I would do one 8824 filing but create 2 groups to separate them.   Your return best to have a 1031 CPA review or do your return...that way you know what to do when you have more of those in the future.   

I dont know re the extend that TT supports multi asset.   The key part IRS concern is how you figure out cost basis of relinquished property and replaced property, IRS has instruction re multi-asset allocation especially re farm, lot to read... 

if you want to use e-file via TT, you may need to provide lot of statements to show your computation and groups.  

[Lily Yu]

Thank you RobertB4444 for your time and advice.

The readings I've done so far also suggested that my farm is a rental property.  Rental property for rental property is a like kind exchange.  

Question #1: Would you elaborate a bit more about "Be careful how you enter it."? 

In Turbo Tax Home & Business, the last step in creating a "Sale of Business property" asks whether one wants to

Report This Transaction

   Would you like to report this transaction on one of these activities (with below radio buttons):

• No Entry
• Business (Schedule C)
• Rental or Royalty Property (Schedule E)
• Farm Rental Property (Form 4835)

I selected "Rental or Royalty property (Schedule E)" and chose to link the relinquished rental house to the 1031 exchange where both relinquished property and replacement property are rental houses, e.g.:  Example - report exchangeQuestion #2: Do I need to link the relinquished (or replacement) property to the exchange transaction?

For the exchange that includes a rental farm as one of the relinquished property, the other two relinquished and all the three replacement properties are rental houses.  

Question #3: I may not be able to report any property to a "SUMMARY" 8824.  Correct?   

Question #4: should my worksheet (I'd use excel) for each pair of the relinquished and replacement properties include entries and/or calculated values (granted some will be zero or blank) that mimics every line on 8824? 

Thank you,

Lily

[RobertB4444]

By 'be careful' I was trying to echo what @lori58sf was saying.  If your farm is a farm then your 1031 exchange is invalid.  You have to exchange 'like kind' properties and a farm and a rental house are not like kind.  A rental house that also has an area of farmland attached to it as part of the rental property can be like-kind with a rental house.  

You only need to link the transactions by answering the questions in TurboTax.  That should fill out form 8824 for you.

Each exchange has it's own 8824 so you can't have a 'summary' form.  However, if your exchange was one property for two properties then all three would be listed on the same 8824 because they're part of the same trade.

The more your worksheet mimics the 8824 the easier it will be for the IRS to understand what you've done.

[Anonymous_]

Real estate is considered like kind with respect to any other type or class of real estate.

See Treas. Reg. §1.1031(a)-1

For example, vacant land is considered "like kind" with respect to residential rental real estate and either of the aforementioned are considered "like kind" with respect to nonresidential rental real estate.

[Lily Yu]

Thank you tagteam for the advice. 

IPX1031 which helped us complete the exchanges also believed that the rental farm is a like-kind with respect to residential rental real estate.  

Tagteam, I did three exchanges last year, with three individual IPX1031 exchange case numbers.  Would you please confirm my questions:

1.  Two exchanges involved one relinquished rental house and one replacement rental house.   
   1. I need to file two 8824 forms, one for each exchange, correct? 
   2. Should I link the exchange to the Schedule E of the relinquished property (in Turbo Tax)?  My apologies for a silly question - what is the use case or reason to link the exchange to schedule E, schedule D, form 8435, or other schedules?
2. The third exchange involved three relinquishes properties (one rental farm, two rental houses) and three replacement properties (all rental houses). 
   1. I need to file a SUMMARY 8824, and attach my own statement for each pair of the relinquished property and replacement property, with information as close as those on a 8824: 
   2. As I need to attach my own statements, the only filing option for me is to paper file my 2021 return.  Correct?
   3. I need to specify in each statement to link it to Schedule E of the relinquished property for the two pairs where the relinquished property is a rental house; specify in the statement to link to Form 4835 where the relinquished property is a rental farm? Correct?

I really appreciate all the responses!

Lily

[Anonymous_]

It appears as if you need to file two Forms 8824 (along with the requisite statements).

What is form 8435 (or did you mean Form 4835)? Was one (or more) of the properties a farm rental?

The whole "linkage" thing does not seem to accomplish much of anything so you can likely skip that procedure.

Again, yes, you will have to paper file to include the statements but there is no need to "link" the statements to the forms in the program; just make sure the statements are complete and accurate.

[Lily Yu]

Thank you Tagteam for the prompt response.

I am a bit confused by "It appears as if you need to file two Forms 8824 (along with the requisite statements)".  I had three 1031 exchanges:

1. The first exchange took place in July / August time frame.  It included one relinquished rental house and one replacement rental house;

2. The second exchange took place in September.  It included three relinquished properties (one rental farm, two rental houses) and three replacement properties (all rental houses);

3. The third exchange took place in November last.  It included one relinquished rental property and one replacement rental property (which was closed Jan this year) .

Please help me understand how many 8824 forms I need to cover all the three exchanges. 

If two 8824 forms are needed, which 8824 covers which exchanges / relinquished properties?.

What is form 8435 (or did you mean Form 4835)? Was one (or more) of the properties a farm rental?  -- I see Turbo Tax provides an option to link an exchange to Form 4835 (for rental farm) as the last step when I tried to create a 8824 (sale of business) in the Home & Business version (below example screen shots FYI): 

Btw, I noticed "linking an exchange" to schedule D and E makes difference to my tax in a situation where taxable cash was taken out of an exchange.   I didn't learn much yet when the first 1031 exchange (July/August last year) happened.  The property tax on the relinquished property, part of the closing cost, was deducted from the "Amount due to Seller", i.e., the "sales proceeds".   Even though the sales proceeds from the relinquished property sale never came to me, the settlement company directly wired that to the QI (IPX1031), unfortunately the "property tax", ineligible like-kind exchange expense, was automatically subtracted from the sales proceeds the settlement company wired to IPX1031.  Therefore the property tax was the "cash taken" and is taxable as "capital gain".

Thank you in advance for your time and advice.

Lily
  

[Anonymous_]

I understand (I think). You are going to need three 8824 forms for your 2021 transactions.

[Lily Yu]

Thanks again Tagteam for your prompt advice.  I think I got it now: 

• one 8824 to cover first 1031 exchange; and
• another one to cover the third 1031 exchange; and
• one SUMMARY 8824 to cover the second 1031 exchange, and three statements, each cover a pair of a relinquished property and a replacement property.

I appreciate your time and expert advices!:)

Lily

[gdstuart1]

Critter-3,

Warning if you're considering going to a CPA to solve this...

The problem I had after throwing up my hands and going to a local CPA in 2018 is that once he did the return, I could not get his forms and logic entered back into TTax, so I now had a gap in my files.  This caused all my carryover data in TTax to be lost so I was facing starting from scratch the next year.  

However, I solved this by opening a new tax file for 2018, basing it on my 2017 file, and just saved it with no return included.  As I hoped, TTax brought forward and updated all the depreciation, IRA basis calcs, etc. that I rely on it for.  

YMMV but it worked for me.

Geoff

[Lily Yu]

Thank you gdstuart1 for the reminder.  I agree with you about "TT memory gap" if a local CPA does my 2021 return. 

By the same token I also wondered about whether I'd run into "TT memory gap" next year due to blank SUMMARY 8824.  I use the desk top TT which allows an empty 8824 but doesn't allow me to enter the "sum of deferred gain" (line 24) or the "sum  of new cost basis" (line 25).  I plan the print the SUMMARY 8824 then manually write these to line 24 and line 25.

I wish TT would support entering a meaningful SUMMARY 8824 and provide 8824 worksheet/statement capability so one can enter all the raw numbers for each statement in TT (so no need to use excel sheet outside TT).  eFile has been super convenient.  Really hope TT in the future will have capability to eFile a return involving SUMMAY 8824 with individual 8824 Statement for each like-kind property to account for situations where a 1031 like-kind exchange includes more than one relinquished or more than one replacement properties are included.

Again I appreciate all the time and advice sharing, from all of you!

Have a great day,

Lily

[gdstuart1]

@Lily Yu,

I'm about to dive in and enter my 1031 exchange from 2021, where I sold a coop in NYC and bought a rental house in Maine and a Delaware Statutory Trust share.  Reading this thread has been quite beneficial.  

On the topic of e-filing, I'm concerned that my NY State return might be non-standard and flunk the e-file test.  That would be a very bad development, since NY absolutely requires everyone to e-file.  I still have my 2020 NY State return sitting on my desk because the TTax e-file failed.  I'll cross that bridge after I get 2021 return done.

[Lily Yu]

@gdstuart1 

Yes I think there could be others who would need to eFile.  I'm lucky as the states involved in my situation still allow paper filing.

I sincerely hope TT will offer capabilities to eFile Summary 8824, 8824 statements/smart worksheets, and eFile for federal and all states regardless if the return includes SUMMARY 8824, in 2022 and going forward.    I am working on a couple 1031 this year, some again includes multiple relinquished properties and replacement properties. 

Best wishes to your NY state return.

Lily

[jhart286]

My summary smart worksheet does not balance on form 8824 like kind exchange. I received a property that the FMV (selling price) is 20k less than property given up also FMV selling price. There were no loans assumed or cash given or received. The exchange expenses were 25k so I thought I was ok. I can’t get the worksheet to balance and it is causing an error. I put the 25k as Exchange Expenses in the next section, “Additional Information regarding Like Kind Property Given Up

any ideas?

[lori58sf]

TT usually handles it well.  

are your expenses are all allowable exchange expenses?   did you calculate adj'd cost base of relinquished property, factored in depreciation? also did you factor in recapture gain?  what amount is deposited into QI who manages your 1031 exchange?  when exchange is completed, did you get a check from them?  

it often is not as simple as you relinquished for , e.g., 100k and replacement is 80k and all expenses is 30k (including recurring, some s/b filed in schedule E ) then you assume no boot and can defer realized gain.