I’ll first apologize to my lengthy inquiry. However, I believe providing real information with hopefully real answers provided by tax experts will assist myself and others in understanding how to file taxes for a Relinquished vs. 2+ Replacement properties, as well as how to work with DST 1031 investments. Relinquished Property2/20/2004 = Purchase Date$310,000 = Purchase Price$248,000 Improvement / $62,000 Land1/31/2022 = Sold Date790,000 = Sold Price$125,000 = Outstanding Mortgage/Loan$90,000 = Calculated Exchanged Basis (Depreciation = $158,000)Replacement Properties (3) – DSTs (using my numbers rounded as an example)$903,000 = Total Replacement CostProperty 1 = Oil & Gas DST$250,000 = Purchase Price (Equity)27.7% = Percent of Total Replacement Cost = $250,000/903,000$24,930 = Portion $’s of Exchange Basis = 27.7% * $90,000 Exchange Basis$225,070 = Excess Basis = $250,000 Purchase Price - $24,930 Exchange BasisProperty 2 = Ford Distribution DST$493,000 = Purchase price = $250,000 (Equity) and $243,000 (Loan)$54.6% = Percent of Total Replacement Cost = $493,000/903,000$49,140 = Portion $’s of Exchange Basis = 54.6% * $90,000 Exchange Basis$443,860 = Excess Basis = $493,000 Purchase Price - $49,140 Exchange BasisProperty 3 = Senior Assisted Living Facility DST$160,000 = Purchase price (Equity)17.7% = Percent of Total Replacement Cost = $160,000/903,000$15,930 = Portion $’s of Exchange Basis = 17.7% * $90,000 Exchange Basis$144,070 = Excess Basis = $160,000 Purchase Price - $15,930 Exchange Basis Questions:PART-1Please let me know if any of the aforementioned calculations are incorrect based on the Relinquished property and the 3 Replacement Properties.Adjusted Basis (8824 Line 18)$208,000 = $90,000 Exchanged Basis from Relinquished property + ($243,000 Loan of 2nd Replacement Property - $125,000 Loan from Relinquished Property)Is the $208,000 the correct amount to proportion across the 3 replacement properties, or is the Exchanged Basis of $90,000 coming only from the Relinquished property the correct value?How is the proportioned number entered as the basis for the 3 Replacement Properties? “Wages & Income” to “Rental Properties and Royalties” to “Assets/ Depreciation” to “Your Property Assets" to “Rental Real Estate Property” to “Nonresidential real estate” to “Tell Us About this Rental Asset”If we consider the Replacement Property 2, is the “Cost” equal to the Purchase Price of the replacement property ($493,000), OR is the “Cost” equal to the proportioned Adjusted Basis number, either $90,000 or $208,000 depending on the answer above? Or, should the proportioned Adjusted Basis number be its own additional Asset/ Depreciation line item, in which you have both the depreciation for the Replacement Property using the Purchase Price ($493,000) AND you have the proportioned Adjusted Basis as well?What should be provided for the “Date purchased or acquired” – either the Purchase Date of the Replacement Property (3/16/2022) or the Purchase Date of the Relinquished Property (2/20/2004)?Under, “Tell Us More About This Rental Asset”Should both of these items be checked: “I traded in an old asset to acquire this one”, and “I purchased this asset”?What is the benefit of inputting the Excess Basis numbers? It does not seem to change anything about the asset depreciation.PART-2Rental Property Expenses for the Replacement Property 2 with a loan.Can all of these items be entered under “Any Miscellaneous Expenses” = Commissions, Dealer Manager Fees, Marketing & Due Diligence, Third Party Due Diligence, Acquisition Fee to TRS, Offering & Org Costs, and Deferred Financing Costs?Do any of these need to be amortized, so they need to go in a different section such as “Enter Loan Information”. I believe all of these items are up front costs to secure the property and the loan, and not yearly fees to manage the property. So they probably should be located in the “Loan Information” section, which appears to amortize items, and not the “Any MISC Expenses” section which does not appear to amortize items.Can we only provide a single 8824 form using the numbers in aggregate, or do we also HAVE to provide a worksheet that details the breakout for the 3 DST Replacement properties, and thus have to mail in our tax filings instead of Efile? Would not providing a worksheet of the details create red flags to the IRS, thus a higher probability of being audited?The DST provided a different depreciation number than what TurboTax calculated. So should we use their number instead – as a replacement, or should I add the difference in depreciation as a new entry?Do I need to figure out the price of Land for both the Ford Distribution Center and the Senior Living Center for depreciation if the Cost is replaced by the Exchanged Basis from the Relinquished Property?. If yes, is there a general formula for Commercial properties? The DSTs did not provide a improvement value vs. land value breakout in any of the closing documents.Do we need to file taxes in each state in which the Ford Distro and Senior Living are residing? It seems like we don’t need to do that for Peregrine (Oil & Gas).How do I claim the remaining finance charges associated with the loan from the Relinquished Property ($35 & $41?) that were being amortized over the length of the loan, but now I have them as stopped using on the Assets/ Depreciation section for the Relinquished Property.Do any of the 3 Replacement Properties qualify for Qualified Business Income? I have never used Qualified Business Income for my 3 single residence properties.

Yes, you have calculated the correct basis to apportion to all three buildings you received in the section 1031 like kind exchange. ($208,000). Read the information next. The original property of $90,000 remains in tact as an asset and continues from the original acquisition date. The remainder basis is apportioned to the new buildings/assets. Enter the 'additional amount' (or buy up fees) as two assets for the additional building(s) and their recovery period begins on the trade date in 2022 (03/16/2022). I suggest entering two new assets by apportioning the remaining additional basis between them. You can do that by using the value of each by the total to apply the percentage against the remaining additional basis. When you enter the new rental you will select 'Commercial (non personal use such as business office, warehouses, etc' this will provide the correct 39 year depreciation schedule for the new assets. To keep it simple I would select that you purchased the assets Part 2: All fees with the exception of marketing would be added to the cost basis as part of the buy up charges. Add those fees to the assets mentioned above before apportioning it. When you enter the new properties (Add another property for each building), you will select as noted above and they will be depreciated using the correct 39 year recovery. You do need an amount for the land for each building. You have one for the original building, use the formula above to figure out the land value or determine a land value you feel is adequate based on acreage and fair market value (FMV) You may have to file a return in each state where the buildings are located if not in your resident state. Do I need to file a state return? - Click the states in question to see if you are required to file. It may be the gross rents and not the net that is required or it may be required simply because you are required to file federal. If you have lending with a new bank for the properties acquired, then you can expense the remaining balance of the finance fees from the original loan. If not, then you add any additional loan fees or points to the remaining points and amortize them over the life of the new loan. If you believe you meet the requirements to use the qualified business income deduction (QBID) you are entitled to take it. Can I get the QBID on my rental income? Click the hyperlinks Finally, one Form 8824 should be sufficient. Keep all of the documents and information that you used to complete the form.

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jamie-m-todd

Question

1031 Exchange to 3 DSTs - How to Calculate and Convert Exchange Basis, Retire Relinquished Property, and Setup Replacement Properties

Forum|Forum|3 years ago
March 14, 2023
3 replies
0 views

I’ll first apologize to my lengthy inquiry. However, I believe providing real information with hopefully real answers provided by tax experts will assist myself and others in understanding how to file taxes for a Relinquished vs. 2+ Replacement properties, as well as how to work with DST 1031 investments.

Relinquished Property

2/20/2004 = Purchase Date
$310,000 = Purchase Price
$248,000 Improvement / $62,000 Land
1/31/2022 = Sold Date
790,000 = Sold Price
$125,000 = Outstanding Mortgage/Loan
$90,000 = Calculated Exchanged Basis (Depreciation = $158,000)

Replacement Properties (3) – DSTs (using my numbers rounded as an example)

$903,000 = Total Replacement Cost

Property 1 = Oil & Gas DST

$250,000 = Purchase Price (Equity)
27.7% = Percent of Total Replacement Cost = $250,000/903,000
$24,930 = Portion $’s of Exchange Basis = 27.7% * $90,000 Exchange Basis
$225,070 = Excess Basis = $250,000 Purchase Price - $24,930 Exchange Basis

Property 2 = Ford Distribution DST

$493,000 = Purchase price = $250,000 (Equity) and $243,000 (Loan)
$54.6% = Percent of Total Replacement Cost = $493,000/903,000
$49,140 = Portion $’s of Exchange Basis = 54.6% * $90,000 Exchange Basis
$443,860 = Excess Basis = $493,000 Purchase Price - $49,140 Exchange Basis

Property 3 = Senior Assisted Living Facility DST

$160,000 = Purchase price (Equity)
17.7% = Percent of Total Replacement Cost = $160,000/903,000
$15,930 = Portion $’s of Exchange Basis = 17.7% * $90,000 Exchange Basis
$144,070 = Excess Basis = $160,000 Purchase Price - $15,930 Exchange Basis

Questions:

PART-1

Please let me know if any of the aforementioned calculations are incorrect based on the Relinquished property and the 3 Replacement Properties.
Adjusted Basis (8824 Line 18)

$208,000 = $90,000 Exchanged Basis from Relinquished property + ($243,000 Loan of 2nd Replacement Property - $125,000 Loan from Relinquished Property)
Is the $208,000 the correct amount to proportion across the 3 replacement properties, or is the Exchanged Basis of $90,000 coming only from the Relinquished property the correct value?
How is the proportioned number entered as the basis for the 3 Replacement Properties?

“Wages & Income” to “Rental Properties and Royalties” to “Assets/ Depreciation” to “Your Property Assets" to “Rental Real Estate Property” to “Nonresidential real estate” to “Tell Us About this Rental Asset”
If we consider the Replacement Property 2, is the “Cost” equal to the Purchase Price of the replacement property ($493,000), OR is the “Cost” equal to the proportioned Adjusted Basis number, either $90,000 or $208,000 depending on the answer above? Or, should the proportioned Adjusted Basis number be its own additional Asset/ Depreciation line item, in which you have both the depreciation for the Replacement Property using the Purchase Price ($493,000) AND you have the proportioned Adjusted Basis as well?
What should be provided for the “Date purchased or acquired” – either the Purchase Date of the Replacement Property (3/16/2022) or the Purchase Date of the Relinquished Property (2/20/2004)?
Under, “Tell Us More About This Rental Asset”

Should both of these items be checked: “I traded in an old asset to acquire this one”, and “I purchased this asset”?
What is the benefit of inputting the Excess Basis numbers? It does not seem to change anything about the asset depreciation.

PART-2

Rental Property Expenses for the Replacement Property 2 with a loan.

Can all of these items be entered under “Any Miscellaneous Expenses” = Commissions, Dealer Manager Fees, Marketing & Due Diligence, Third Party Due Diligence, Acquisition Fee to TRS, Offering & Org Costs, and Deferred Financing Costs?
Do any of these need to be amortized, so they need to go in a different section such as “Enter Loan Information”. I believe all of these items are up front costs to secure the property and the loan, and not yearly fees to manage the property. So they probably should be located in the “Loan Information” section, which appears to amortize items, and not the “Any MISC Expenses” section which does not appear to amortize items.

Can we only provide a single 8824 form using the numbers in aggregate, or do we also HAVE to provide a worksheet that details the breakout for the 3 DST Replacement properties, and thus have to mail in our tax filings instead of Efile? Would not providing a worksheet of the details create red flags to the IRS, thus a higher probability of being audited?
The DST provided a different depreciation number than what TurboTax calculated. So should we use their number instead – as a replacement, or should I add the difference in depreciation as a new entry?
Do I need to figure out the price of Land for both the Ford Distribution Center and the Senior Living Center for depreciation if the Cost is replaced by the Exchanged Basis from the Relinquished Property?. If yes, is there a general formula for Commercial properties? The DSTs did not provide a improvement value vs. land value breakout in any of the closing documents.
Do we need to file taxes in each state in which the Ford Distro and Senior Living are residing? It seems like we don’t need to do that for Peregrine (Oil & Gas).
How do I claim the remaining finance charges associated with the loan from the Relinquished Property ($35 & $41?) that were being amortized over the length of the loan, but now I have them as stopped using on the Assets/ Depreciation section for the Relinquished Property.
Do any of the 3 Replacement Properties qualify for Qualified Business Income? I have never used Qualified Business Income for my 3 single residence properties.

DianeW777

Yes, you have calculated the correct basis to apportion to all three buildings you received in the section 1031 like kind exchange. ($208,000). Read the information next.

The original property of $90,000 remains in tact as an asset and continues from the original acquisition date. The remainder basis is apportioned to the new buildings/assets.
Enter the 'additional amount' (or buy up fees) as two assets for the additional building(s) and their recovery period begins on the trade date in 2022 (03/16/2022).
I suggest entering two new assets by apportioning the remaining additional basis between them. You can do that by using the value of each by the total to apply the percentage against the remaining additional basis.
1. When you enter the new rental you will select 'Commercial (non personal use such as business office, warehouses, etc' this will provide the correct 39 year depreciation schedule for the new assets.
2. To keep it simple I would select that you purchased the assets
Part 2: All fees with the exception of marketing would be added to the cost basis as part of the buy up charges. Add those fees to the assets mentioned above before apportioning it.
When you enter the new properties (Add another property for each building), you will select as noted above and they will be depreciated using the correct 39 year recovery.
You do need an amount for the land for each building. You have one for the original building, use the formula above to figure out the land value or determine a land value you feel is adequate based on acreage and fair market value (FMV)
You may have to file a return in each state where the buildings are located if not in your resident state.
1. Do I need to file a state return? - Click the states in question to see if you are required to file. It may be the gross rents and not the net that is required or it may be required simply because you are required to file federal.
If you have lending with a new bank for the properties acquired, then you can expense the remaining balance of the finance fees from the original loan. If not, then you add any additional loan fees or points to the remaining points and amortize them over the life of the new loan.
If you believe you meet the requirements to use the qualified business income deduction (QBID) you are entitled to take it.
1. Can I get the QBID on my rental income? Click the hyperlinks
Finally, one Form 8824 should be sufficient. Keep all of the documents and information that you used to complete the form.

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jamie-m-toddAuthor

Hello Diane,

Thank you for taking the time to answer all of those questions!

I'll look over your comments today and let you know if I have any additional questions.

I do have one question now. Is someone like yourself able to become a Live Agent to assist in a similar fashion as a TurboTax CPA with the TurboTax Premier Live offering? Is someone able to specifically request your assistance?

Thanks!

Jamie

DianeW777

Yes, you can request TurboTax Live if you are using TurboTax Online by following the instructions in the link below.

How do I get TurboTax Live?

You are not able to specifically ask for me, but we have tax experts who have all the experience you will need to assist you.

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DianeW777

Although you cannot depreciate the amount assigned to the oil & gas property, you must assign a value to it as it was also a property received in the trade.

If royalties are produced the depletion allowance is one way to have a deduction. Since minerals are a finite source and will eventually play out, the IRS code generally allows royalty owners to deduct up to 15% of the income from their mineral interests.

IRS Publication 535

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jamie-m-toddAuthor

Hello Diane,

Yes, the depletions have already been setup at 15% for the Oil and Gas property. TurboTax did that for me...very handy!

Can you please break this statement down a little further for me? "Although you cannot depreciate the amount assigned to the oil & gas property, you must assign a value to it as it was also a property received in the trade."

Are you saying that the value of the Oil and Gas property ($250,000) still needs to be included in the "Fair Market Value of like-kind property received" in the "Sale of Business Property" section? If YES, I still have that populated.
Or, are you implying that a portion of the original property's land ($62,000) still needs to be apportioned to the Oil and Gas property, even though I technically only own the minerals? Is this a must have step to connect it to the 1031 Exchange? Or is that done with #1 above?
Even if #2 is YES, I would not apportion any of the "additional" basis to the oil and gas property? Is that correct? I believe that is what you said in your earlier email today.

Thanks so much!

Jamie

jamie-m-toddAuthor

Sorry Diane, I forgot to tag you on the earlier message. Please see above.

@DianeW777

Thanks!

Jamie

DianeW777

It seems the issue may be that although there is only 90,000 remaining balance of cost basis before the trade you may be using that actual number for the new asset, which would not provide the results you need. It's important to emphasize that all components of the original building must retain in tact. Purchase price and land at full value and original date acquired, even if split between two properties.

It should be the original basis divided by the two properties and then the accumulated depreciation listed. The asset you enter for the two buildings should be the exact same as the original entry if you add them together. I copied your information below. Although we are dealing with a balance of $90,000 you must prorate each figure to arrive at the correct depreciation (purchase price, land, date acquired). Are you using the proration against the original figures or only the $90,000 which will never work out.

As we discussed the change in recovery periods for one of the buildings requires manual tracking to eliminate excess depreciation.

You must split the $310,000, the land of $62000 to enter your original asset for each of the buildings received in the trade, with the percentages you arrived at.

Relinquished Property

2/20/2004 = Purchase Date
$310,000 = Purchase Price
$248,000 Improvement / $62,000 Land
1/31/2022 = Sold Date
790,000 = Sold Price
$125,000 = Outstanding Mortgage/Loan
$90,000 = Calculated Exchanged Basis (Depreciation = $158,000)

You're doing well in trying to understand all of this, however you might consider using a tax professional to prepare your return for this year. Hopefully this information

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jamie-m-toddAuthor

@DianeW777

Good evening Diane,

Once again, thank you for your input and your patience!

I do have a few more questions/ confirmations (in terms of going in the right direction):

It seems odd to me why the Original Basis ($90,000) identified in the Sale of Business Property section is not used when populating the Cost field in the asset depreciation section for the respective replacement properties. I've seen several references by the TurboTax Community to do so, and in some cases people seem to combine the Original Basis with any Additional Basis to have 1 asset depreciation entry versus 2.
However, I went ahead and apportioned the original Sales Price ($310,000), Asset Value ($248,000) and Land Value ($62,000) between the 3 replacement properties - using the same apportion % calculated for that property across the Sales Price, Asset Value, and Land Value. For example, in the case of the Senior Living Center, when I took its FMV and divided it by the total FMV across all 3 replacement properties, it came to about 18%. This translated into the following:
1. 18% * Sales Price $310,000 = $55,800; populated in the Cost field of the Original Basis entry under Asset Depreciation.
2. 18% * Land Value $62,000 = $11,160; populated in the Land field in the same section.
  1. Please note, to try to simplify things, in using the 18% to drive the land value, I did not factor in what percentage the land value really is as a percentage of the FMV of the Senior Living Center. I honestly don't even know what that calculation would look like.
3. With these 2 values, TurboTax would have calculated the apportioned Asset Value as $44,640, which is 18% of the original Asset Value of $248,000
4. TurboTax then calculated the Prior Depreciation as about $28,000, which is within a couple $100 dollars of 18% of the original properties Prior Deprecation (18% * $158,000 = $28,440). So it seems like TurboTax is now calculating this value correctly. Do you agree?
Now comes to the Ford Distr Center, I did the same exercise as above but consistently using 54% (as its apportion percentage) to drive the various values.
1. 54% * Sales Price $310,000 = $167,400
2. 54% * Land Value $62,000 = $33,480
3. TurboTax would have calculated the apportioned Asset Value as $133,920.
4. Now comes the discrepancy, probably dealing with the 39 year depreciation schedule. TurboTax calculated the Prior Depreciation as about $60,000. However, in using the same 54% against the original Prior Depreciation of $158,000 I am calculating about $86,000. Is this where you are advising that I override the $60,000 value with the $86,000 value to prevent excess depreciation? Please confirm.
In respect to the Oil and Gas property, which is using depletion for mineral rights versus asset depreciation, its apportion percentage is about 28%. Even though I am not doing any type of asset depreciation in TurboTax, I still need to preserve the following (outside of TurboTax):
1. 28% * Sales Price $310,000 = $86,800
2. Land Value = Seeing this property doesn't have land (only minerals), do I have to pass on the $17,360 (28% * 62,000) to the other 2 properties? If yes, how would I divide that out? And by doing so, it will cause each property's remaining original basis to drop, right? But maybe that is the right thing to happen?
3. 28% * Asset Value $248,000 = $69,440.
4. No further actions are necessary, as the Asset Value cannot be depreciated for the Oil and Gas property. However, I need to save this value and use it when the property is sold.

I know I typed a mouthful, but any insight/confirmation you can provide will be so appreciated. I so greatly appreciate your patience!

Thanks so much!

Jamie

jamie-m-toddAuthor

@DianeW777

Hello Diane,

I just wanted to touch base with you to see if you had a chance to review my previous message? I've learned so much from you so far, and I feel I am very close to correctly completing the 1031 Exchange setup in TurboTax. My hope is that you will find the patience to work with me to put the finishing touches on my 2022 tax filing.

FYI - About 2 weeks ago I did reach out to a couple of Live TurboTax experts. However, due to the nature of my request being specific to a 1031 Exchange, and a complex one at that, they were not able to provide the guidance that I needed.

I'd be so appreciative to get closure on the 1031 Exchange with you, as I feel it is right around the corner.

Kind regards,

Jamie