Let's pretend: TP sold an asset for the business or rental with an original basis of $100k and adjusted basis on sale of $60k. They sold the old one for $100k and bought a new one for $100k,

The deferred gain is $40k, and the new property has a basis of $60k, which is the only number being depreciated.

The new property, basis $60k, should be depreciated over 27.5 or 39 years straight line, which is not the same as the old property continuing depreciation.

Thank you so much for your explanation, 100% agree with what you said. The problem is the deferred gain now shows up in the 2024 tax return added to the income. Probably the entry for the exchange in 2023 had a problem. I did exactly what the article mentioned in my original post explained. I think I need help with that part. Is there a more comprehensive article about entering the like-kin exchange details?

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@Babak wrote:

 1. The depreciation for the old property was not accurate (it was sold in February but it appears to be depreciated for almost the entire year). 2. the old property (that was given up in Feb 2023) is still being depreciated in 2024.

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Unless they elected out of that treatment, in most cases it is correct to continue to depreciate the old property using the old placed in service date.  Then there is a second asset that is depreciated for the 'extra' amount paid for the property using the new placed in service date.

There is an option to elect out of that treatment and treat the new Basis as the only asset to be depreciated.  But you would need to manually enter the disposition date on the old Asset Entry Worksheet to stop the depreciation (filling out the 8824 does not automatically do that).  [Edit: Sorry, I didn't see this was ProConnect; I am unsure if that is the same method in ProConnect as it is in ProSeries].

Thank you, what about the gain showing up in the 2024 return while it should be deferred?

I have no idea how the could happen.

Where is it showing up?

Was it showing up immediately after transferring 2023 to 2024?  Or were you entering something and then it showed up?

It immediately showed up when I started working on 2024 return. Would it work if I delete the old asset, manually enter the new asset bases as the old asset adjusted basis and start depreciating the new asset over 27.5 years?

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@Babak wrote:

It immediately showed up when I started working on 2024 return. Would it work if I delete the old asset, manually enter the new asset bases as the old asset adjusted basis and start depreciating the new asset over 27.5 years?

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If the election out wasn't made on the timely filed 2023 tax return, you need to depreciate it as two pieces:  (1) Continue to depreciate the old asset (the exchanged/carryover Basis) and (2) Start depreciating the 'extra' Basis (excess Basis).

You didn't say where this gain is showing up on the 2024 return, but you'll need to track down where that is coming from.

Everything was executed and filed based on the like-kind exchange rules. The problem is I did not do their taxes for 2023 and I built that one first and started working on 2024 return.

To answer your question, the gain shows up on form 4797 and it's coming from form 8824. Again, probably it's because I did not do their taxes in 2023 and just tried to make that one before working on 2024 return.

If the 1031 Exchange was in 2023, Form 8824 should not be part of the 2024 tax return.  You may need to delete it.

As I said, if the election was not made in 2023, you need to separately depreciate the two components of each asset (which usually has a better result anyway).

Got it, but since the election was done in 2023, does it make sense if I delete the old asset, manually enter the new asset bases as the old asset adjusted basis and start depreciating the new asset over 27.5 years?

Your original post seemed to indicate that the election to treat it as ONE new/combined depreciable item was not made in 2023.

Was that election made?  If not, it must be depreciated as two items, in which case no, you can't delete the old asset to change it to one new/combined asset to depreciate.