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Completing a like-kind exchange in the 1040 return

SOLVED•by Intuit•193•Updated 1 year ago

Before you start:

  • IRS Regulations changed effective January 1st, 2018. A like-kind exchange, or 1031 exchange, can only be completed for real property. See here for more details.
  • A like-kind exchange consists of three main steps. All three steps must be completed for the tax return to contain the correct information.

Step 1: Disposing of the original asset

  1. Open the Asset Entry Worksheet for the asset being traded.
  2. Scroll down to the Dispositions section.
  3. In the Date of disposition field, enter the date the property was given up.
  4. Do not complete any other information in the Dispositions section. Entering other information, such as sales price, will generate the Form 4797.
If multiple assets were included in the trade simply enter the same Date of Disposition on each asset given up.

Step 2: Completing the 8824

  1. Open the 8824.
  2. In the Form 8824 General Information Smart Worksheet complete lines A-C.
  3. In Part I complete lines 1-7 with the applicable trade information.
  4. Complete the Summary Smart Worksheet:
    • Lines A-F will pertain to the property received.
    • Lines G-K will pertain to the property given up.
    • If no additional property was given up leave like J blank. Entering a 0 will result in the need to enter data in the Additional Information Regarding UNLIKE-Kind Property Given Up Smart Worksheet.

Example of the Summary Smart Worksheet for an even exchange:

Example of the Summary Smart Worksheet for an exchange with Cash Received:

Example of the Summary Smart Worksheet for an exchange with Cash Given:

  1. Complete the Additional Information Regarding Like-Kind Property Given Up section lines N through T.
  2. If Line J contains a value the Additional Information Regarding UNLIKE-Kind Property Given Up Smart Worksheet will activate and require entries. Complete these if Unlike property was given up.
  3. ProSeries will now flow these entries to the 8824 to complete the required calculations. There are some important lines to review:
    1. Line 23 is the amount of gain, if any, that will be taxable on the tax return.
    2. Line 25 is the Basis of like-kind property received. You'll need this for Step 3.
    3. The Replacement Property Depreciable Basis Components Smart Worksheet will show the Exchanged (carryover) basis and the Excess (additional) basis for both regular tax and AMT. You'll need these for Step 3.

Step 3: Entering the new asset entry worksheet(s)

Before you create the new asset, you'll need to decide if you're electing out of the regs in IRC Section 1.168(i)-6(i). If you are electing out of the regs then only one new asset entry worksheet is needed. If you elect to use the regs then you'll need multiple asset entry worksheets (one to track excess basis and one to track exchange basis).  Complete the appropriate Step 3 for your choice:

  1. Open the business Schedule where the asset needs to be linked to (Schedule C, Schedule E Worksheet, etc).
  2. In the Expenses section click on the QuickZoom to the Asset Entry Worksheet.
  3. Enter a description of the new property and click Finish.
  4. Complete the Asset Information section with the data from the 8824:
    • Date acquired and Date placed in service would be from the dates from the like-kind exchange, not the date placed in service of the original asset.
    • Cost or basis should be the Basis from the 8824 line 25.
    • Choose the most accurate Type of asset.
  5. Scroll down to the MACRS Property Involved in a Like-kind Exchange or Involuntary Conversion section.
  6. For Elect OUT of regs under Sec 1.138(i)-6(i) select Yes.
  7. In the field, If this asset represents entire basis of replacement property, enter excess basis enter the Excess (additional) basis from the 8824 Replacement Property Depreciable Basis Components Smart Worksheet.
  1. Open the business schedule where the asset needs to be linked to (Schedule C, Schedule E Worksheet, etc).
  2. In the Expenses section select the QuickZoom to the Asset Entry Worksheet.
  3. Enter a description of the new property and select Finish.
  4. Complete the Asset Information section with the data from the 8824:
    • Date acquired and Date placed in service would be from the dates from the like-kind exchange, not the date placed in service of the original asset.
    • Cost or basis should be the Exchanged (carryover) basis from the 8824 Replacement Property Depreciable Basis Components Smart Worksheet.
    • Choose the most accurate Type of asset.
  5. Scroll down to the MACRS Property Involved in a Like-kind Exchange or Involuntary Conversion section.
  6. For Elect OUT of regs under Sec 1.138(i)-6(i) select No.
  7. Create and enter a unique numerical Asset ID for this like kind exchange.
  8. In the field, If this asset represents exchanged basis of replacement property, enter: you'll need to enter the details regarding the property given up.
  9. Scroll to the top of the Asset Entry Worksheet and select the QuickZoom to another copy of Asset Entry Worksheet.  
  10. Enter a description of the new property and select Finish.
  11. Complete the Asset Information section with the data from the 8824:
    • Date acquired and Date placed in service would be from the dates from the like-kind exchange, not the date placed in service of the original asset.
    • Cost or basis should be the Excess (additional) basis from the 8824 Replacement Property Depreciable Basis Components Smart Worksheet.
    • Choose the most accurate Type of asset.
  12. Scroll down to the MACRS Property Involved in a Like-kind Exchange or Involuntary Conversion section.
  13. For Elect OUT of regs under Sec 1.138(i)-6(i) select No.
  14. Enter the same Asset ID you used for the first Asset Entry Worksheet.

The first asset containing the Exchanged basis Section 179 cannot be claimed but Special Depreciation Allowance may be claimed if eligible. The second asset containing the Excess basis both Section 179 and Special Depreciation Allowance may be claimed if eligible.

  1. Open the Car and Truck Expenses Worksheet of the vehicle you wish to dispose of.
  2. Enter a date of disposition on Line 47 to stop depreciation as of the date of the exchange (Vehicle Expenses Worksheet for Form 2106, Line 41).
 

Don't enter a sales price. Entering a sales price, even a zero, forces the program to assume there's no exchange occurring. The program will then calculate a gain or loss as if a normal sale occurred.

  1. Double click on Line 53a to link this vehicle to Form 8824.
  2. If necessary, enter amounts on Lines 53b and 53c.
  3. Open Form 8824.
  4. Complete all applicable fields on Form 8824.
  5. Open the Car and Truck Expenses Worksheet (Vehicle Expenses Worksheet for Form 2106).
  6. Add the newly received vehicle in the next available column (create a new copy of the worksheet if necessary). Use the figure from Form 8824, Line 25 in determining the cost or basis on Line 30.
  • If the taxpayer traded this vehicle in for a new vehicle, select a Form 8824, Like-Kind Exchanges, to use to compute the gain or loss.
  • You can only report one vehicle trade-in on each copy of Form 8824. However, you can link multiple components of a vehicle acquired by trade-in to the same Form 8824. Just be sure to enter the same Asset ID number on line 42 for each vehicle.
  • Line 53b and 53c only apply to autos subject to the luxury auto limitations.
  • If the actual expense method was used in all prior years, the program computes lines 53b and 53c automatically.
  • If the standard mileage method was used in any year, you must compute the depreciation equivalent of the standard mileage deduction as explained under Standard Mileage Rate in the Help menu using total miles driven instead of business miles, and post the result on lines 53b, and 53c. However, don't enter an amount greater than the total cost of the vehicle.
  • Once completed, Form 8824 will calculate the basis of the new vehicle.

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