Basis and how to split it from 1031 Exchange

Forum|Forum|3 years ago
March 24, 2023
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I sold a land parcel for $233k that had a basis of $53167.46. I bought 2 land parcels and a parcel with a house for a total price of $552500. I calculated the allowable "exchange expenses" at $15553.11.

TurboTax Form 8824 says I has a realized gain of 164280 and line 25 shows a new basis of $388220. Take 233k - basis + expense to get the gain (ignoring the pennies) and that is what I got, but the new basis number makes no sense to me. The mortgage I took on that house was for $337836.32, so that plus the transferred basis is $391003.80 which is higher before taking any expenses into consideration.

So going forward do I use my calculations for basis or must I start with Form 8824 Line 25?

Then how would I split the basis (whatever it is) over the 3 properties? Split the basis so there is gain on each property, or can I make the land only ones all basis and the gain go entirely on the house? Another thought, the properties all abut and were once a single parcel can I treat it all a a single "land" plus house? Once I have the split I know to use the property tax split of 10/90 to separate land from house.

I have a bunch of expenses to find the identified exchange properties, do home inspection and other closing costs before even beginning to make the house rentable, repair and furnish, which I'm required to do.

Would these all be added to the depreciable basis for the house added to Schedule E?

Can I even just add all the costs up to the house being ready to rent to use as the house "cost" and depreciable basis?

Anonymous_

Employee

@ScottTS wrote:

I sold a land parcel for $233k that had a basis of $53167.46. I bought 2 land parcels and a parcel with a house for a total price of $552500. I calculated the allowable "exchange expenses" at $15553.11.

TurboTax Form 8824 says I has a realized gain of 164280....

I cannot be certain, but I suspect something went wrong with how you entered the transaction.

Just using round numbers for the fair market value and basis of the vacant land you relinquished and the exchange expenses you posted results in almost the exact amount of realized gain (i.e., $233k - $16k - $53k = $164k). So, it is almost as if the exchange was never reported (or reported incorrectly).

You might want to go back through the like-kind exchange section and verify that you entered the figures correctly.

For one thing, the mortgage you took on the replacement property should not factor into your exchange calculation.

RobertB4444

@krupacreative is right - that gain is what would be showing if you did no exchange. So you should go back in and check those entries.

You can also add up all of the costs that you have for closing on the properties and then renovating and repairing prior to the property being available for rent. Once it is on the market you can either add all those costs to the basis or create a separate asset (call it 'set-up costs' or 'start-up costs' or something) and depreciate that asset separately over the same 27.5 year period.

So, your basis on the properties, which can be spread out over the three however is best for you to manage using that 90/10 rule, should be the basis on the property you exchanged, plus the gain on the new property plus the costs to renovate and set up the property.

@ScottTS

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