I converted my primary residence into a rental property three years ago. Last year, I completed a 1031 exchange, where I exchanged that rental property for two new residential rental properties. The overall gain on the sale of the original property was over $500K, and I received $500K in cash. I turned around and contributed over $500K to close the purchase of the two replacement rental properties. I am also eligible for the Section 121 exclusion for this transaction.
I received two 1099-S forms from the title company: one reporting the cash proceeds (box 2 for Gross Proceeds) and the other showing no amount in box 2 but with box 4 checked, indicating the transaction involved a 1031 exchange. I completed Form 8824 in TurboTax as a combined transaction.
From my understanding, this transaction is tax-free, and the gain is deferred. I want to ensure the reporting is accurate. Based on my reading of IRS Publication 523 (Selling Your Home), it appears that I must report the sale of the original property on Form 8949 and Schedule D, given that I received a 1099-S. However, this doesn’t seem right to me because there is no taxable gain or depreciation recapture. Additionally, I don't believe Form 4797 should be generated for this transaction.
Please confirm that, for reporting a 1031 exchange from one residential rental to two residential rentals, I need to prepare a separate statement and only complete lines 19 through 25 on Form 8824. It appears TurboTax (downloaded version/Forms) doesn't have the capability to report an exchange of one residential rental for two residential rentals.
I am entering this transaction myself through TurboTax, but I would appreciate feedback from the community on the correct forms that need to be filed. Thank you!
