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

[Lily Yu]

Thanks WCT888 for all the detailed information.  This helped me feel more confident about my 2021 tax return that I mailed last Friday.   I used excel to calculate the 8824-statements and included those with the SUMMARY 8824.  Hope that complies IRS rules.

We're working on a few more 1031 exchanges in 2022.  The steps you outlined here would help us next April (if IRS rules remain).

Appreciate very much your posting the detailed steps.  Like you I am also not a CPA or TT profession, this forum has helped me to get the 2021 tax return done.  Thank  you very one who contributes and helps this forum and community thrive!

Have a great day,

Lily 

[CEM05]

On the Asset Worksheet under MARCS Property Involved in a like-kind Exchange or Involuntary Conversion

Line 58 Elect OUT of regs under Sec1.168(i)-6(i) and you choose "Yes" What effects does this have?

[lori58sf]

it means you choose to OPT OUT the IRS 2 schedule depreciation and choose 1 to treat replacement as new.

Opt in:  

you continue depreciation  on relinquished for its remaining yrs with its adj'd basis (rollover basis)

you start a new depreciation (27.5 y for residential) and its basis is the additional money needed to complete the purchase.  

Opt Out

e.g, calculated new basis (rollover + new)  is on new depreciation schedule, for 27.5 yrs, if residential. 

benefit of opt in is more depreciation annually and IRS like it.  but you need to keep good book...as most roll 1031 from one into another....  opt out, less annual but it is significantly less complicated.  also the actual depreciable is only on improvement, not land.

you may want to add an additional statement in TT filing and let them know you chose the election and it is noted on form 4562 of replacement(s).

[CEM05]

I like easier, but I have not made up my mind which way to go.

Thank You

[CEM05]

If I opt in, I have a couple questions. First I know I will need to file a paper return as I have replaced one property with two properties. I have created a spreadsheet with all the information I  need.

My question is this. Where will the deferred gain be inputted with a MARCS of 27.5 years?

Then where will I add the Basis of the like-kind property received be inputted with a MARCS of 15.5 years?

I hope this makes sense.

[lori58sf]

to Opt in, DONT check that box!  the two schedules are for depreciation...

1. continue the relinquished which you should have depreciation schedule already, you just continue and modify w/ just the rollover basis, 

2. you enter 2 new assets as rental (they s/be like-kind, so I assume yours is rental) that triggers 2 forms (4562). the additional money needed to complete the purchase, total purchase = sale price + new money, is your new excess basis.  you need to follow the guideline in IRS regulation to allocate excess basis to each of 2 replacement.  

hope above makes sense.  dont forget to keep track going forward...likely you will sell one or both and roll them into another 1031 exchange while the current relinquished is still enjoying its depreciation...

[lori58sf]

new money = excess basis.   hope that makes sense.  if you was to opt OUT, then rollover basis + excess basis = new total cost basis of which you allocated per IRS guideline for each of 2 replacements.  good luck.  

you mention you are Opt IN, so no election needed.  you continue rollover basis over the remaining years left from original 27.5y.   and excess basis starts on 27.5y.

[CEM05]

Just one more clarification.  I built a spreadsheet which duplicated the functionality of form 8824.  So the question evolves around the following two lines.

line 24; Deferred gain....   $xxx,xxx. 

line 25; Basis of like-kind property recieved....  $xxx,xxx

Do I apply the Deferred gain to the the property given up or to the property purchased?

Thank You

[WCT888]

Hi CEM05,

For our calculations related to your subject matter:

1) Relinquished property side - FMV (sold price) - adjusted Basis = realized Gain

Adjusted basis = Original purchase price + improvements (this combination of values is the depreciable basis) - total depreciation taken to point of sale (closing) of relinquished property.

2) If there were no cash withdrawn, no mortgage boot, no ordinary boot, then realized Gain = deferred realized Gain.

3) Replacement property side - FMV (sold price) - deferred realized gain = new cost basis for replacement property (27.5 yrs depreciation schedule)

Hope the above helped.

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 

[MSS6245]

I have tried to follow these instructions but I continue to get hung up.  After entering all of the information for the property I gave up and the property I received, it asks if this was with a related party. I answer NO, It then asks if I ALSO gave up additional property.  I again answer NO.  When I continue it says the value must add up to $XXX.  Something doesn't balance.  Any Idea?

[WCT888]

Hi MSS6245,

After you gain access into the data entry section for Form 8824, there were essentially 4 quantities TT required to be entered (not referring to the dates when you turnover relinquished property(ies) or start service of replacement property(ies) in the following order:

The page - Like-Kind Property Given Up

1) Adjusted Basis of Like-Kind Property you gave up (relinquished)

2) Fair Market Value of the property you gave up (total sold price)

Note - we assumed there were no mortgage to be paid off

Next page - Like-Kind Property Received

1) Fair Market Value of Like-Kind property you received (total purchase price including upgrades, landscaping, etc)

Note - we assumed there were no new mortgage to be assumed

Next page - Related Party Exchange - NO

Next page - Different Property Given Up - NO

Next page - Different Property Received - just hit continue, or make sure enter $0.0 in the cash received box, then hit continue (assume no boot)

Next page - Exchange Expenses - enter here

a) All closing costs for selling relinquished property

b) Exchange Qualify Intermediary costs

Note - we did not enter here the closing cost for the Replacement properties as these occurred after the 1031 exchange timeline, when the QI transferred the exchange monies with the deferred GAIN to the Title Escrow Agency for the replacement property, the 1031 Exchange is technically completed.

Next page - Your Like-Kind Exchange Result: NO TAXABLE GAIN

Next page - Your Like-Kind Exchange Results: Deferred Gain

The number displayed is the amount of deferred gain transferred to Replacement Property for calculating the NEW COST BASIS.  This amount should match your calculation of [FMV RELINQUISHED] minus [Adjusted Basis of Relinquished]

Next page - Your Like-Kind Exchange Results: New Property Basis

The number displayed is the amount of the depreciable basis for the replacement property.  See earlier colleagues discussing the OPT OUT or OPT IN for the MACRS for Asset Worksheet of the Replacement Property for single depreciation of the new cost basis over 27.5 yrs or accelerated depreciation for the portion of the new cost basis that came from remaining depreciation of the relinquished property.

Next page - Report This Transaction - we chose No entry as there was NO RECOGNIZED GAIN

Then ALL DONE.  We were using TT Home and Business

Hope the above helped.

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

[techierob]

An 8824 is required to be submitted the following two years. Does TurboTax automatically do this? or do I need to open up the 8824 forms again and re-enter the info I put from the initial 8824? 

[lori58sf]

Did you do a related exchange?  i.e, box 7 is checked?  if so, you do for 2 yrs.  pretty sure you need to enter. 

[AmyC]

The About Form 8824, Like-Kind Exchanges states: If during the current tax year you transferred property to another party in a like-kind exchange, you must file Form 8824 with your tax return for that year. Also file Form 8824 for the 2 years following the year of a related party exchange. See the instructions for Line 7, later, for details.

@techierob  -related party sales must file for 2 years.

[KellyTaxesaremything]

When we entered the info for the new rental property, it didn't let us enter the house as an asset?