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

[jhart286]

Hi Lori and thanks for responding

I answered the questions on the form as FMV of property received and given.  I have also calculated my adj basis in the property given but that does not go in that area.  I believe when doing a 1031 you need to spend at least as much as you sold your relinquished property.   I also had read that the exchange costs (brokers fees, title work, closing fees, plus Qualified Intermediary expenses) would reduce the property relinquished (given) value by this amount. In my case the relinquished was 20k more than the given property but the expenses were 25k 

the amount that the QI received and later disbursed was less by the amount of a mortgage 100k  that had to get paid off.  It was not assumed by the new owner. I also obtained a new mortgage on the received property side and this was not an Assumption.  The QI held the difference (cash) until needed for settlement of the new property purchased or exchanged for. Not sure where recapture gain has to do with this form but perhaps I don’t understand the questions asked on it.  The form is specifically asking for FMV Of the like kind property received and given

thank you for listening 

Jim 

[Lily Yu]

Hi lori58sf,

Thank you for your time and response.  Please see my response to each of your question, and my question about Turbo Tax Home and Business Desk version at the end.  I appreciate your time and help. 

are your expenses are all allowable exchange expenses?

Yes.  I use Turbo Tax Home and Business Desk version and have no question.

did you calculate adj'd cost base of relinquished property, factored in depreciation?

Yes.  I use Turbo Tax Home and Business Desk version and have no question.

also did you factor in recapture gain?  

Yes.  I use Turbo Tax Home and Business Desk version and have no question.

what amount is deposited into QI who manages your 1031 exchange?  

Yes.  I use Turbo Tax Home and Business Desk version and have no question.

when exchange is completed, did you get a check from them?  

No.  I used 1031 IPX and they handled all my like-kind exchanges including accepting the "sales proceeds" from the settlement companies who closed the sale of the relinquished properties, and sending the sales proceeds (less IPX charge) to the settlement companies who closed the purchase of the replacement properties.   Turbo Tax worked just fine for every 1031 exchange that involved one relinquished property and one replacement property.  It calculated correctly the captured capital gain, deferred capital gain, and new cost basis for the newly acquired replacement property. 

The challenges I have with the Turbo Tax (Home and Business Desk version) are as follows:

• Per IRS rules for the above scenario, I need to file a SUMMARY 8824 (filled as below) and 8824 statements for each property.

                  

• TT (desk top, home & business) allowed me to create a SUMMARY 8824 within TT and I was able to manually enter SUMMARY on line 1.  It does not allow me to enter Line 23 or Line 25 as both are "TT calculated fields".  Thought I could print the SUMMARY 8824 with my name, id number and line 1, then ink-fill Line 23 and Line 25.  However the SUMMARY 8824 form was auto-excluded from the saved tax return pdf file.  I.e., there is no SUMMARY 8824 to print and ink-fill Line 23 or Line 25. 
• In the end I went to IRS web site and filled a SUMMAY 8824 and printed it there. 

                      

                       

• Turbo Tax (home and business, desk top) doesn't provide worksheet or anything along that line for me to enter 8824 statements for properties in the scenario where a 1031 exchange involved multiple relinquished and/or replacement properties.   
• I had to use some tool (used excel) outside Turbo Tax to create the 8824 statements (with the necessary calculation).  

•  Turbo Tax (home and business, desk top)  doesn't seem able to eFile my tax return including the SUMMARY 8824 form (from IRS web site) and 8824 statements (in excel). 
• As a result of the above challenges, I printed out my return (several hundred pages) for paper filing.  

I'd be obliged if someone can help me to eFile my return with the Summary 8824 and 8824 statements with Turbo Tax (Home and Business, Desk Top version). 

Thank you very much in advance for your time and advices.  Have a great weekend,

Lily

[Anonymous_]

I am virtually 100% positive that you will not be able to e-file with that configuration.

[Lily Yu]

Oh ok.  Thank you tagteam for the advices.

Have good night,

Lily

[lori58sf]

when you fill out f8824, in the summary smart worksheet, you  enter property received's contract price.   since your transaction is simple, not involving any non-cash items received, you only need to provide contract price .

same is true for property given up, use the contract price .  again, you mentioned a simple transaction no other items involved. so for that worksheet, there are only contract prices of sale and purchase.  worksheet will not show 0, I think you mentioned purchase is about 20k less of sale...  in worksheet where TT calculates Line 15, you can enter allowable expenses....

did you get mortgage on replacement after exchange or all part of exchange, if latter, you need to calculate. you should not get recaptured.   you just enter all info asked in the worksheet, TT will calculate for you.   

[lori58sf]

Form 8824 for you is for summary, in other words, Line 1 you put SUMMARY.   TT however will force you to put dates for Lines 3-6.   you dont enter any numbers on that form.  Line 23 , since you said you can defer all realized gain, then you just enter 0.  Tt will accept that.   then on Line 25, you override it with your new cost basis .  

you then provide statements for each property received and that statement must provide all requested Information on F8824, you need to show calculation, use worksheet method is the best.  

You mentioned your exchange transactions are 100% like-kind but you need to show proof because of one property is a farm that you lease out to others ( I guess to farm) and you also lease out the house on the Farm.   Farm has different depreciable basis, unlike residential house/condo.  But you said your investment firms confirmed all are like-kind.   likely you have proof from them.  Honestly, if I had your situation, I would paper file. e-file likely wont have many options for you to attach info you need to show IRS .    also get an accountant who has done many 1031 exchanges to review your return before you mail them out.  it is money worth spending.    

in this forum, we all give our best knowledge and not getting involved to know all detail of anyone's return   the forum is knowledge sharing.  each of us just need to figure out what info pertains to our case, and what not.

sorry cannot help you anymore...  good luck~ 

[CEM05]

Lori,

I have a question concerning the form 8824 as a summary and that is I have a small "boot" which needs to included on 8824 form. Is this possible?

Thank You

[RobertB4444]

Yes.  TurboTax has a space to enter any non-like kind property received in the exchange when entering the 1031 exchange.

[lori58sf]

yes.  TT has a good worksheet and ask info ...you just put info in and it will calculate boot.   the key is relinquished and replacement property $ must the contract price, and re exchange expenses, only non recurring ones , others you enter in schedule E for those properties.  good luck

[CEM05]

I should have explained a bit further. I have to create a summary 8824 form for a muitiple property exchange where the property being given up resulted in a small "Cash Received" or as it is referred to a "boot" it must appear on line 15...... and I just answered my own question as line 23 is where it will actually ends up to populate correctly as Capital Gains.  🙂

[jhart286]

Thanks for response. My 8824 is simple but I had to take out calculations for line 15 and just override and fill out starting with line 16 and it all worked out. My mortgage on received property was not part of exchange 

I calculated my exchanged carryover basis and added the exchange expenses which is the excess additional basis.  Both together are my new adjusted basis 
now I have to figure my 2 states taxes. My domicile and the rental state.  I don’t think either recognize 1031 pass thru.  If they did I wonder if I can deduct my passive suspended carryover loss 

thanks again

[Lorena4]

So were you finally able to get it to work in the online version?  I've been having an incredible struggle trying to get the 1031 stuff to come out correctly (it keeps trying to show my unrealized gain on the sale as a realized gain).  I have been on chat sessions with 3 different agents, still to no avail.  Two different times, the chat was cut off suddenly, while we were in the middle of trying to resolve something.

I am thinking I will have to download the desktop version (as one of the agents said that functionality may only be available in the desktop version.  Who knows? SO frustrating!

[CEM05]

I have only used desktop versions to do my taxes.  Like you this is my first time doing a 1031 exchange and it is a bit frustrating just trying to under stand what the IRS wants.

For myself when I started from the beginning of this long thread and read all the questions and answers it really helped me understand a lot more about 1031 exchanges.

Good Luck, Sorry I could be of more help.

[AmyC]

@jhart286 There are many variations among the states but PA is the only state that really will not recognize the 1031 at all. You will need to check state laws as you may not have suspended losses in a state, they may have been allowed.

@Lorena4 If you decide to switch to the desktop, you can download your .data file and not have to re-type anything. See how to make the change here.

[WCT888]

Hi Lily,

I only found this TT discussion thread after completing our 2021 tax returns, in which we sold 8 relinquished properties, used IPX1031 as the QI, and exchanged for 3 like-kind replacement properties, all declared correctly within 45 days, and completed the exchange within 180 days in 2021.

A shout-out of "thank you" to all Experts, TagTeam, Randy, and many others whose comments, discussion, and advice (dating back to 2020) served to complete the knowledge base of how to work around the limitation of TT (Home and Business for us), in generating the correct Form 8824 for filing.

We employed the following:

1) We grouped the relinquished properties into Idaho Exchange Portfolio (4 properties) and Nevada Exchange Portfolio (4 properties); this was required by IPX1031 as the depository trust laws are different for the 2 states.

2) We developed an EXCEL Spreadsheet for each of the 2 groups, in which we calculated for each relinquished property within the group the adjusted cost basis, realized gain, total deferred realized gain (same as realized if no boot or cash out), recognized gain.  Improvements (renovations before sale of the relinquished properties) were recorded as increase of the original purchase costs (raised adjusted basis calculation, lowered deferred realized gain), and recorded in Sch E as expenses (painting, refacing) and depreciation items (appliances, which IRS allows one time full depreciation).

3) We then summed for all 8 properties the adjusted cost basis and deferred realized gain, into a TOTAL adjusted basis and deferred realized gain for apportioning to the 3 replacement properties calculation.

4) For the 3 replacement properties, we established each, in the EXCEL spreadsheet, as a new property in Sch E, identifying solar panel costs, landscaping, water softeners, vertical blinds (major purchase) as depreciable assets with the correct method of depreciation.

5) For the Purchase Cost of the Replacement Properties in Sch E, we employed Randy's suggestion (circa 2020) of entering the New Cost Basis (add the land cost because TT will subtract the land cost again for the basis to start the depreciation), so TT will start the 27.5 yrs SL depreciation with the correct amount.  This for single depreciation of the New Cost Basis.  For accelerated depreciation of the remaining adjusted cost basis of the relinquished properties, you have to remove that amount from the New Cost Basis.

6) For the accelerated depreciation of the remaining depreciable value of the 8 relinquished properties, we apportioned the total to the 3 replacement properties based on a pro rata basis of their FMV (purchase cost).  However, when we establish this "Remaining Un-depreciated Value of Relinquished Properties" as an asset for depreciation, we have to enter in the original purchase date and purchase price for this asset (as if it is the relinquished properties), so TT will confirm the already depreciated value from the previous years, and continue to depreciate correctly for the remaining years (for us 6.5 yrs for some, and 11.5 yrs for others).

7) We were confused by the methodology of Form 8824 (Lines 15 - Lines 25) versus accountancy publications and TT community advice on how Adjusted Basis, Realized Gain, Deferred Gain and Basis of Like-Kind property were calculated.  We resolved our misunderstanding after the following algebraic proof:

Equation 1:  New Cost Basis Replacement = FMV Replacement - Deferred Gain from Relinquished

Equation 2:  Deferred Gain from Relinquished = FMV Relinquished - Adjusted Basis Relinquished

substitute Eq 2 into Eq 1

Equation 3: New Cost Basis Replacement = (FMV Replacement - FMV Relinquished) + Adjusted Basis Relinquished

If you take the difference in FMV between the Replacement and Relinquished + the Adjusted Basis of the Relinquished, you have the New Cost Basis of the Replacement; it is counter intuitive until you see it algebraically.

😎 For TT to generate Form 8824 correctly,

- we entered SUMMARY on Line 1 and Line 2;

- the date the first relinquished property was acquired (Line 3);

- the date the first relinquished property was sold (Line 4);

- the date we identified the replacements (Line 5; TT will check if this date is within 45 days of Line 4); and

- the date we closed on purchasing the first replacement property (Line 6; TT will check if this date is within 180 days of Line 4)

- for Line 15 - Line 25, we entered values based on our EXCEL Spreadsheet TOTAL calculations, and the rest of FORM 8824 / work sheet calculated without errors.

We submitted a simplified version of our EXCEL Spreadsheets with comments and explanations as our supported documents to Form 8824; and yes, we cannot eFILE with supporting docs, so we had to mail our tax return.

There was good advice from a colleague on this forum regarding inputting in TT what date the relinquished properties were removed from rental service and how to deal with Sch E questions about the "sale" of the relinquished properties when there was no sale.  By happenchance we implemented this before reading the colleague's good advice, so we will see whether TT 2022 will automatically remove all 8 relinquished properties from our tax return.

We will make available the EXCEL Spreadsheet to colleagues (future and present) who may benefit from using it to check their calculations for complex 1031 like-kind exchanges.  Leave your email in a future comment / response.

DISCLAIMER - we are NEITHER TurboTax professionals NOR Tax Experts, NEITHER CPA NOR Tax Accountants.  The reader is advised to consult their CPA and Tax Accountants on how to complete any IRS forms correctly. 

We did not want to lose the repository function of TT for the last 22 years by turning the 2021 tax return to a CPA/Tax Accountant; so we struggled with it like all the colleagues sharing on this forum.  Again, thank you all for your insights.

With kind regards,

WCT888