1031 exchange and irs form 8824

[Rohnn Kostelecky]

irs rules for a 1031 exchange are the most convoluted in the entire tax code, IMHO. Nobody "exchanges" a property and a mortgage for another property and mortgage, its usually always sell and buy or buy and sell. The most frustrating part is they do not allow any "fixup" expenses, yet almost everybody fixes up their property before they sell. How do you report fixup expenses?

[Dave Foster]

@Rohnn Kostelecky, You'll either capitalize those expenses so they add to the basis of the property.  Or you'll expense them in the current year.  When doing a 1031 it's more to your advantage to expense them becasue you get the full write off in the current year.

BTW - The reason for the word "exchange" is because the IRS views this as exchanging properties with your QI.  You don't sell a property (even though it is deeded directly to the buyer).  The QI is on the settlement statement as the seller.  You don't "buy" a property (even though it is deeded directly from seller to you).  The QI is on the settlement statement as the buyer.  

If you didn't sell or buy what did you do??? You exchanged with the QI.  And that is what one court called "The legal fiction of a 1031 exchange" !!!!!!  An artificial hassle.  But one with sweet results when done right.