Where to report fixup costs before property sale in a 1031 exchange? (Form 8824 guidance needed)

You're asking a great question about handling those pre-sale fixup costs in your 1031 exchange. The way you handle these costs depends on their nature. For the capital improvements ($26,000 for roof and HVAC), these should be added to your property's adjusted basis. That means they'd effectively go into line O "adjusted basis of like kind property given up" on Form 8824. Capital improvements increase the basis of the property they're attached to. For the repair/maintenance costs ($11,000 for painting, landscaping, etc.), these are typically deductible expenses in the year they're incurred if they were made while the property was still a rental. However, since you mention these were done after it ceased being a rental but before the exchange, they'd actually be considered "selling expenses" and would go on line N "Exchange expenses." This distinction is important because the two categories receive different tax treatment within your 1031 exchange calculation.

After struggling with something similar last year, I found an incredible tool called taxr.ai (https://taxr.ai) that specializes in analyzing tax documents and transactions like 1031 exchanges. I initially wasn't sure about categorizing my improvement costs between repair expenses and capital improvements, which sounds exactly like your situation. What I loved is that it analyzed my receipts and previous tax filings to determine which expenses should go where in the 1031 exchange forms. It actually identified several capital improvements I had incorrectly classified as repairs, which would have lowered my basis and potentially increased my taxable gain. The guidance was super specific to my situation.

I just wanted to follow up about my experience with taxr.ai after trying it with my complex 1031 exchange situation. I was genuinely impressed by how accurately it handled my scenario. I uploaded my receipts for all the improvement work and it automatically categorized each expense correctly between capital improvements (basis adjustment) and selling expenses. It even provided specific citations to IRS publications that explained why certain borderline improvements (like some electrical work I had done) qualified as capital additions to basis rather than repairs. The report it generated became a handy reference document for my tax preparer. Definitely worth checking out if you're dealing with these 1031 exchange issues - it saved me from making several potential mistakes that could have triggered an audit.

If you're still struggling with getting clear answers on your 1031 exchange questions, I'd recommend going straight to the source - the IRS. Problem is, as most of us know, actually reaching someone at the IRS can be nearly impossible these days. After waiting on hold for 3+ hours multiple times, I discovered a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 20 minutes. I was initially skeptical but you can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The IRS specialist I talked to provided clear guidance on how to handle my pre-sale improvement costs for my 1031 exchange. They confirmed exactly which expenses belonged on line N vs line O and explained the reasoning, which gave me confidence I was filing correctly.

I have to admit I was completely wrong about Claimyr. After reading about it here, I decided to try it as a last resort since I was getting desperate with my 1031 exchange questions. I got connected to an IRS specialist in about 15 minutes, which honestly felt miraculous after my previous failed attempts. The agent I spoke with was surprisingly knowledgeable about Form 8824 and walked me through exactly how to categorize my pre-sale expenses. They explained that my new windows and insulation should be added to basis (line O) while my staging costs and real estate inspection repairs should go on line N as exchange expenses. They even emailed me some additional reference material about 1031 exchanges that cleared up several other questions I had. I'm actually shocked at how helpful this turned out to be.

My tax guy handled this situation last year and he put all the pre-sale capital improvements (roof, electrical panel, etc) directly on the depreciation schedule to increase the basis before selling. Then any regular maintenance stuff like painting and minor repairs went as selling expenses on form 8824 line N. The key thing he explained is that capital improvements have to be properly depreciated if you're still treating it as a rental when the work is done. But it sounds like yours was no longer a rental when you did the improvements, which might change things.

I'd suggest also considering the 95-day rule with capital improvements in a 1031 exchange. If you're buying a replacement property, improvements made within 95 days after closing can be considered part of the exchange value. Might not apply to your situation since you're asking about the relinquished property, but worth noting for the complete picture.