1031 Exchange expenses

[kashblack1953]

In stepping through a like kind exchange I come to a screen where TurboTax is asking for any sales expenses, which includes:

Sales expenses include the following:
- Sales commissions
- Advertising expenses
- Legal fees
- Loan charges paid by the seller, such as loan placement fees or points
- Broker fees
- Transfer taxes
- Option premiums

This in turn populates line K (Exchange expenses total) of the smart worksheet for line 15 of Form 8824. Unfortunately what is requested are only the expenses associated with the relinquished property, not the qualified intermediary fee and costs associated with the purchase of the replacement properties. Where are these costs entered?

[Anonymous_]

See https://www.irs.gov/instructions/i8824#en_US_2022_publink12597kd0e518

Line 15 and Line 18

[kashblack1953]

Thanks! I have read the IRS instructions. My question is where in TurboTax are these expenses entered? 

[Anonymous_ · Accepted solution]

In the interview for "Exchange expenses".

Any other expenses will have to be entered in Forms Mode on Form 8824 (which may require an override voiding the accuracy guarantee and most likely preventing the return from being e-filed).

[kashblack1953]

The exchange expense input is for the property being disposed (sold), not for expenses associated with the exchange or replacement properties, such as qualified intermediary fees and closing costs. I tried entering these costs with the property disposal costs, however this reduces the deferred capital gains, which isn't correct. I tried manually editing form 8824, however I don't know how to handle the AMT entries. This seems to be an omission, how is this brought to TurboTax's attention? 

[Anonymous_]

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@kashblack1953 wrote:

.............how is this brought to TurboTax's attention? 

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It already has been brought to their attention and is, quite frankly, low priority.

[kashblack1953]

Sad - because it's a pretty straight forward fix. All that's needed is to add a screen to enter expenses associated with the replacement property acquisition and move the logical test for if the replacement costs is less than the net of the property that is disposed until after the disposal and acquisition costs have been entered. As it is the like kind exchange feature should be disabled since it won't allow a user to properly account for this type of a transaction. Support at TurboTax told me I that I should purchase professional tax software if I wanted it done correctly. How does TurboTax's guarantee and audit defense work in this situation?

[Anonymous_]

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@kashblack1953 wrote:

How does TurboTax's guarantee and audit defense work in this situation?

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Good question, but the answer is that they do not work due to the fact that multi-asset exchanges are not supported.

[kashblack1953]

Good try, but the issue is the same with a single asset being exchanged. Program isn't doing the accounting properly

[leannepaul]

Hi - does anyone know whether this issue has been fixed since 2022? We did a 1031 this year and are debating whether to use TurboTax or go back to an accountant.

[kashblack1953]

Sorry, Turbo Tax generally doesn't fix problems. I did find a work around that gave the right answers but that was two years ago. Just finished another so get to figure it out again when I do 2025

[leannepaul]

Hmm, we'll probably try it and if we get totally frustrated just file an extension and then find an accountant! 

Thanks for the quick reply!

[curtjenny]

We did a 1031 in 2004 and then exhanged that property in 2008. We just sold that property in an installment sale yesterday. Unfortunately, I cannot locate the actual Turbo Tax files from those years (or can locate them but not be able to figure out how to open them after so long), and I cannot recall what Turbo Tax did with the exchange expenses. I do have .pdfs of both exchange year's taxes. The supporting details of form 8824 in 2008 enumerate expenses (commission, exchange fees, recording and escrow fees etc.) of $51,000 related to the transaction. Will those have been added in by Turbo Tax to the basis of the property received in 2008 so that the cost basis shown on Form 8824, Part III, Line 25 (Basis of Like-Kind Property Received)  INCLUDES those amounts and is what I should use for the 2025 sale? Or have those been included in Line 18, the basis of the property given up? On the 2004 return, the basis of the property we gave up and the property we received were both listed as 268,335, and on the 2008 return each property's basis is listed as 291,351, a difference of $23, 016. We had several capital improvements on the property that we gave up in 2008, so it is plausible that this $23,016 is just those. So does the new basis of the property acquired in 2008 not yet include the $51,000 in expenses that we can now add to the basis in calculating the taxable gain on our 2025 sale?

[AmyC]

1. I can't find tax law for 2008 for the 1031. Common sense leads me to think the expenses related to selling the property were added to the basis of the property sold while purchasing expenses were added to the basis of the new property. The fees to the exchange agent should go into the basis of the new property. You alone have the paperwork from the purchases and exchange.

2. No, you would not add it now. It has to have been used in the past. You do not carry over expenses like that. If the new property had a basis in 2004 of $268,935 and was depreciated and then had a higher value 4 years later - this requires improvements to have been made to offset the depreciation and still have an increase in basis. You clearly spent additional funds between 2004 and 2008. 

[gr3849]

Hi, I have the same issue and was wondering what was your work around solution? 

Thanks

Jerry