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

[tagteam]

You might want to read the articles at the links below re your depreciation options.

https://www.journalofaccountancy.com/issues/2008/nov/depreciatepropertyinlikekindexchangesconsistent...

https://www.thetaxadviser.com/newsletters/2020/mar/deductions-like-kind-exchanges-cost-segregation.h...

[randoodle]

@malletshop ,

I'm confused by the dates in your post.  If you gave up a property in 2020, but received a property in 2021; the exchange would have been for TY2021.  Why (and how) did you file an 8824 for TY2020 when the exchange did not take place yet?  1031 exchanges are tricky timewise.  You may need to consult a CPA on this one, especially to ensure that you are meeting the 45-day and 180-day rules.

When entering the new property for Schedule E, you should use the date you acquired the new property (or put it into service).  The property will be depreciated as normal, but will use the exchanged value (from form 8824) as the cost basis.

[tagteam]

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@randoodle wrote:

If you gave up a property in 2020, but received a property in 2021; the exchange would have been for TY2021.  Why (and how) did you file an 8824 for TY2020 when the exchange did not take place yet?  1031 exchanges are tricky timewise.  You may need to consult a CPA on this one, especially to ensure that you are meeting the 45-day and 180-day rules.

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I wholeheartedly agree with consulting a CPA for this scenario.

Regardless, the exchange is reported (on Form 8824) in the tax year in which the relinquished property is given up. If the property was relinquished in 2020, then the exchange would be reported on Form 8824 with the taxpayer's 2020 return. The exchange then needs to be completed by the filing deadline for the 2020 return or 180 days after the sale of the relinquished property (some taxpayers have to file for an extension if the property is relinquished late in the tax year).

It is not unusual for an exchange to span two tax years, but the transaction must be reported in the tax year when the exchange began, which is not necessarily the same tax year the replacement property is received. 

[malletshop]

HI Randy

IRS publication states Form 8824 is filed when you relinquish the like-kind. It was relinquished end of year 2020 so the tax year that form was filed is 2020. The like-kind property received was in 2021, within the time allotted to identify, select etc. The like-kind property received was acquired 3/15/2021. Are you saying I should have added the property on my Sch. E 2020 return even though it was acquired on 3/15/2021?

[malletshop]

Correct, @tagteam, I gave up the property end of year in 2020. The exchange is reported when the relinquished property is given up. Form 8824 was filed in 2020 tax year. The property received was identified and acquired within the allotted time. All that is correct. 

My question now is, should I have also have added the received property on my 2020 Sch. E in my 2020 return? I did not do that, since it closed on 3/15/2021. I'm adding it now to my 2021 Sch. E Tax return. I can amend my 2020 is needed. Thanks for your advice. 

[tagteam]

Did you read the articles in the links I posted previously? I will post them again.

https://www.journalofaccountancy.com/issues/2008/nov/depreciatepropertyinlikekindexchangesconsistent...

https://www.thetaxadviser.com/newsletters/2020/mar/deductions-like-kind-exchanges-cost-segregation.h...

In short, there are two options:

Option 1: Depreciate the carryover basis of property acquired during the current tax year over the remaining recovery period of the property exchanged. Use the same depreciation method and convention that was used for the relinquished property. 

Option 2: Treat the adjusted basis of the exchanged property as if it was disposed of at the time of the exchange. Under this election, treat the carryover basis and excess basis for the acquired property as if placed in service on the date acquired. 

[lori58sf]

do you know if Turbo Tax Business version handle form 8824?  

I have a 1031 exchange under trust, 1041 return, and I cant trigger form 8824 via your suggestion ...but I could add form 8824 from form.  may be that is the way to do it?  do you know?

[malletshop]

I'm not certain if TT Business is laid out the same; I use Home & Business.  In H & B, under "Business" / Sale of Business Property, when you select update, the next page is "Any Other Property Sales" and there's a box for like-kind exchanges. 

[tagteam]

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@malletshop wrote:

I'm not certain if TT Business is laid out the same; I use Home & Business.  

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TurboTax Business does not handle a 1031 exchange in the same manner as Home & Business (unfortunately).

[tagteam]

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@lori58sf wrote:

do you know if Turbo Tax Business version handle form 8824?  

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The program can handle a Form 8824 (in the sense that the form is included).

However, you will likely have to complete most (if not all) of the transaction in Forms Mode.

For some reason, I cannot seem to trigger the "Sale of Business Property" section that the program states will be triggered if you indicate you disposed of an asset.

[lori58sf]

it does not have that...I tried to use tips from other version.  no luck

[lori58sf]

yup. so basically use 'form' mode to do all needed for F8824.   in Sch. E I put stop use date on relinquished .   then I added replacement via sch. E.    TT will do all those correctly.  then likely need to print and mail return...

I think TT needs to support like kind exchange in business version especially since law changed in 2019 (could be 18) that personal home cannot go through 1031...so it seems if any version needs to support, it is Business Version!  TT team, would you consider it?

[tagteam]

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@lori58sf wrote:

...so it seems if any version needs to support, it is Business Version!  TT team, would you consider it?

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They most likely would not as there are too many other pressing concerns.

Also, real estate held for personal use (i.e., a personal home) was never eligible for a 1031 exchange. The property always was required to be held for productive use in a trade or business or for investment.

[malletshop]

Thank you, Yes I read those articles. The only question I have is re: the like-kind property received and the date I use on Sch. E / Form 4562 (Asset Entry Worksheet) line 2 & 3 on worksheet. I was instructed to do the following by Employee Tax Expert @DianeW777:

• Go back to your rental activity and then enter the new assets with the exact same information as the property given up with a new name, but with the same date placed in service as the old property, for all assets that are part of the exchange.

• Enter a new asset for any buy up/added cash in the exchange including the purchase/selling expenses you paid in the trade. The new asset will begin depreciation on the completion date of the trade/like kind exchange.

In summary, as I understand, the new asset now bears the same date placed in service as the relinquished property, which was originally acquired AND placed in serviced on 10/04/2005. The acquired date for the new asset on Sch. E / Form 4562 Asset Entry Worksheet uses the same date placed in service as the old property. This now allows previous depreciation on line 10.  

Can you confirm this is accurate? (see below)

[PII removed]

[DianeW777]

Yes, you are correct.  If you used all the original numbers from the original property, then this is accurate. And as noted, you would add an additional asset for any buy up or added cash.  It will have the same recovery period but with the current date as if you were adding a capital improvement.

The property received in the like kind exchange carries on as though it was the original property.  The is the why you are allowed to defer gain until the final property owned is sold.

@malletshop