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how to handle depreciation after sale of rental property with 1031 exchange

Forum|Forum|5 years ago
March 14, 2021
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I sold one rental property (house A) and purchased another one (House B) by a 1031 exchange. House A had some capital improvements that were still being depreciated at the time it was exchanged for House B. Turbotax has had me continuing to claim depreciation on those capital improvements even though I no longer own House A. I don't think that was correct. Since it was a 1031 exchange, can I continue to claim depreciation on improvements on House A that weren't fully depreciated at the time of the exchange for House B? If not, what should I have done in Turbotax to remove those improvements from my Form 4562? In other words, how do I tell Turbotax that those capital improvements on House A were sold with the house?

Thanks.

Best answer by DianeW777

The information you received is correct. The depreciation asset for the property given up in the Section 1031 exchange remains the same without change, including your improvements to the property given up. It must go forward for the new property as though it is the same real estate (you could rename it). You do not tell TurboTax the improvements were sold. They are part of the cost of the property received in the trade.

Any additional cash or funds paid in the exchange, above and beyond the property itself, is another and separate, distinct asset with the recovery period of 27.5 years, this can include any improvements to the new property received after the exchange in the year of the exchange.

For future tracking and records this is the simplest and most convenient way to move forward after a Section 1031 real estate exchange with the need to keep records of the actual exchange to show any additional funds paid for the new asset. The new asset will begin the depreciation recovery in the year of the exchange. The asset for the property given up keeps the same character with no changes.

TurboTax can handle this easily and your time factor can be significantly less for your tax return.

D

DianeW777Answer

The information you received is correct. The depreciation asset for the property given up in the Section 1031 exchange remains the same without change, including your improvements to the property given up. It must go forward for the new property as though it is the same real estate (you could rename it). You do not tell TurboTax the improvements were sold. They are part of the cost of the property received in the trade.

Any additional cash or funds paid in the exchange, above and beyond the property itself, is another and separate, distinct asset with the recovery period of 27.5 years, this can include any improvements to the new property received after the exchange in the year of the exchange.

For future tracking and records this is the simplest and most convenient way to move forward after a Section 1031 real estate exchange with the need to keep records of the actual exchange to show any additional funds paid for the new asset. The new asset will begin the depreciation recovery in the year of the exchange. The asset for the property given up keeps the same character with no changes.

TurboTax can handle this easily and your time factor can be significantly less for your tax return.

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T

TigerMOAuthor

Thank you @DianeW777 -

That brings me to the second half of the question.

I've now also sold House B, the rental that was acquired through the 1031 exchange. In Turbotax, it asked if I had sold the rental property and I replied Yes. Turbotax filled in the Date Sold on the Disposition Report of the house, but didn't do anything with the land (as a separate asset not subject to depreciation) or with any of the capital improvements either from House B or the capital improvements carried over from House A when it was sold. My Turbotax questions are:

If the gross sales price of House B was $200,000 (including house and land), how do I get TT to allocate the sales price between the house and the land for the Disposition Report?
For every capital improvement listed on Form 4562, how do I tell TT to dispose of all of them since I'm assuming I can't continue to claim depreciation on property I no longer own?
For each of those capital improvements, how do I go about determining the Gross Sales Price and the Basis? I know what their initial cost was, so do I just subtract the accumulated depreciation and that's now the basis?

Questions #2 and 3 go together. Can I use Easy Step to have it walk me through the disposition of each asset or do I use some worksheet? I think I kind of know what needs to be done, but I'm not sure how to interact with Turbotax to make it happen.

Many thanks. I hope my explanation makes sense.

D

DianeW777

Here are the answers to your questions.

First determine the sales price for each asset (normal procedure when there are several assets).
- To figure out the selling price for each asset:
1. Take the current basis of each asset against the total combined basis of all of your assets to figure out the sales price for each one; OR
2. Determine a fair market value for each asset against the total value of all assets to figure out the sale price for each one.
3. If you made any capital improvements in the year of sale, you should add that as part of your selling expense.
Go through each asset to indicate it was sold and enter the selling price and sales expense for each asset.
TurboTax will do the rest as far as determining cost basis, depreciation and report the sales in the appropriate places.

The following steps will help you through the sales process once you have all the figures you need.

Start with the Federal tab
Click on Income and Expenses
Under Your income and expenses, scroll down to
Rental properties and royalties, click Edit/Add
Do you want to review your rental?, click Yes
Under Rent and Royalty Summary, click Edit
Click Update to the right of Assets/Depreciation. Do you want to go directly to your asset summary?, click Yes and Continue
Click Edit to the right of the assets to be disposed
Go through several screens until you get to Tell Us More About This Rental Asset
Click on This item was sold…….
And continue to answer the questions