Background:
In 2021, I performed a 1031 like-kind exchange and sold one rental property and used the proceeds to buy two. I used TurboTax Home & Business which automatically generated a 8824 Like-Kind Exchange form and the process seemed successful.
Now, while working on 2022 taxes, TurboTax has automatically imported the sold property. It said “We need to keep these income items… even though we can’t remove them, don’t worry” and referred to rent from the sold property. When clicking through the sold property, TurboTax had automatically selected Carryovers “I have passive activity real estate losses carried over from a prior year.” and proceeded to list last year's passive losses . Continuing to click through leads to a prompt that says “since this property was not a rental at all in 2022, you should delete it as a rental” (because I sold it). Continuing will delete the property.
These steps have caused a lot of confusion and I’m not sure how to proceed. I double checked my 2021 taxes and they seemed reasonable but I’m not an expert. I suspect TurboTax knows the property is sold but has kept it in place due to the carryover loss.
Questions:
old property still there. that's probably correct in that you continue to depreciate the relinquished property over its remaining useful life. only the additional basis for the new property gets depreciated starting from scratch (full useful life). assuming there was no taxable gain (full deferral) those suspended losses remain suspended until gain is recognized for tax purposes.
the net basis of the old property (cost less all depreciation for period prior to exchange) plus the basis of the new property should equal line 25 of the 8824.
Should I leave the property in TurboTax without touching it further, or should I follow the prompts which end up deleting it due to lack of rental activity?
Unfortunately, allowing TurboTax to keep it's default values (carried over from last year) results in the final review complaining that the relinquished property should not appear on the Schedule E worksheet. This is because it hasn't been rented.
Should I remove the property from the rentals since it's no longer rented? This would probably fix the review error.
TurboTax specifically imported the relinquished property with "passive losses from prior years" for Sch E. If I remove the property, this info may disappear. How do I capture these losses after removing the relinquished property?
we need more info as to what the replacement property was used for or its intended use.
We sold one relinquished rental property then used all of the funds, plus addition funds, to purchase two replacement rental properties.
Turbotax does not handle multi-property exchanges well.
anyway unless you elected differently the relinquished poerty needs to be allocated between the replacement properties but the tax basis is depreciated over the remaining useful life so basically you would have the follwing
1) tax basis old land replacement property 1
2) tax basis old land replacement property 2
3) increase in tax basis allocated to new land property 1
4) increase in tax basis allocated to new land property 2
5) tax basis of old building allocated to replacement property 1 which continues to get depreciated over its remaining tax life
re
6) same for old building allocated to replacement property 2
7) remaining tax basis allocated to new building property 1 which is depreciated over its full depreciable life
😎 the same for basis allocated to new building property 2
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there was an option to roll the basis of the relinquished property into the new property and then the entire depreciable portions would have been deprecated over their full depreciable lifes
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so I agree you need a tax pro especially since I don't know if a late election to roll old basis into new is available. if it is, your 2021 return will need to be amended