Calculate prorated section 121 allowed deduction

[willatbird]

Client completed a 1031 exchange. Rented out the property for a year and then converted to personal use. They held the property for a total of 5 years.

My understanding is that their $250,000 exclusion needs to be prorated for the non-personal use of the property. Lacerte does not seem to be able to do that and as soon as you check the box that it was acquired in a 1031 exchange, all of the exclusion is disallowed.

Lacerte Support says to just override. I would love to know if someone has figured out how to get the software to calculate the allocated amount.

[TaxGuyBill]

I think the 1031 Exchange disqualifies it.

§121(d)(10) says:

(10) Property acquired in like-kind exchange

If a taxpayer acquires property in an exchange with respect to which gain is not recognized (in whole or in part) to the taxpayer under subsection (a) or (b) of section 1031, subsection (a) shall not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the hands of such taxpayer) during the 5-year period beginning with the date of such acquisition.

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[scheunemanncpa]

I think that at best you can only exclude gain that happened after it was switched to personal use.  You would need to have the value at the switch to personal use and the appreciation from that date is the most you could possibly exclude.

[willatbird]

As long as the property is held for a minimum of 5 years and the 2 year residency is met, a proportionate amount of the gain can be excluded, but the depreciation must be recaptured. (Codified in 2008 and more specifically in {I think} 2016). If you own the property for 6 years after the exchange and live in it for 4, you can use 2/3 of the 121 exclusion.

I know how to calculate the amount of the exclusion, I was just surprised that there's no way to get the software to assist.

[willatbird]

Yes. I know how to calculate it, just wondered if there was a way to get the software to participate. It appears that it's an override.

[willatbird]

PS The exclusion is based on days of personal use vs days of business use, so it's a time thing, not a valuation thing.

[TaxGuyBill]

If it was held over 5 years, you are right, the exclusion applies.  Your original post just said 5 years.

Your original post also said that the program eliminates the exclusion when you indicate that it was acquired in a 1031 exchange.  So that is the problem.  Whether or not the program is incorrect with doing that or if you have the dates wrong (it needs to be over 5 years), you'll need to figure that out.  If the program is wrong, just uncheck the 1031 thingy.

As for the Nonqualified Use to prorate the exclusion, I am almost certain that the program is able to do that.  However, I am a ProSeries users, so I can't specifically guide you how to do it, except for suggesting to look for the term "Nonqualified Use" on the screens.