Question

Depreciation Cost Basis for 1031 real estate exchange

Forum|Forum|6 years ago
October 2, 2019
2 replies
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I paid $115000 for House 1 and sold 16 years later for $390000. I bought House 2 using 1031 exchange for $452000, $30000 land and $422000 for dwelling. Cash paid was $452000 less $390000, or $62000.

Is the cost basis for depreciation:

A. $62000

B. $452000

C. $115000 + $62000????

Richard

A

Anonymous_

Employee

I have to presume that when you say you "sold" House 1 and "bought" House 2 that you meant you "exchanged" House 1 and House 2 (hopefully using a qualified intermediary).

Regardless, your total basis would be C, but do not forget that you have 16 years worth of accumulated depreciation that does not simply disappear.

In sum, you have $115,000 in exchanged basis and $62,000 in excess basis (and note that land is not depreciable so that needs to be subtracted out of the calculation).

T

Think57

I have a similar question regarding my 1031 exchange. Did I do this correctly?

- Line 25 of Form 8824, Basis of like-kind property received, is 505,273. This takes into account all of the depreciation and improvements of the relinquished property, as well exchange & closing expenses for both the relinquished and received propertes

- The building of the relinquished property still has 37,345 of basis to depreciate. I continue to depreciate this over its remaining life on the received property's depreciation schedule as carryover depreciation.

- The received property's building is valued at 538,629. Its Excess Basis is 538,629 less 37,345 of carryover depreciation basis from the relinquished property for a value of 501,285. I depreciate 501,285 for the received property as Excess Basis over 27.5 year on the received property's depreciation schedule. Thanks for your help!

V

Vic_R

@Think57 , @Anonymous_

I'm not an expert, but that doesn't sound correct, as you seem to be ignoring the calculation from form 8824. Using the approach to continue the current depreciation schedule forward it seems you would subtract that from the new adjusted basis of the like-kind property calculated on form 8824.

I just want to clarify 100% before I file that you do use this new adjusted basis calculation from 8824 not just in the future when you sell the new property, but also to figure the new depreciation schedules (by percentage) for the structure, land improvements, etc. This makes a really big difference in long term strategy if you can only depreciate what is essentially the adjusted basis from the replaced property plus added basis from the new property. For example, selling a property after 30 years with a huge gain and trading up a little to multiple properties doesn't leave anything close to the actual cost basis of the new properties.

T

Think57

Hello Vic-R and thank you for your post. I am not clear about the number on Line 25 of Form 8824, the Basis of like-kind property received. Seems to me that it is the basis only to be used for determining the capital gain of the replacement property if you sell the replacement property. I am confused on how we can use this number on Line 25 of Form 8824 for depreciation purposes because it is derived from Fair Market Value (FMV) numbers for both relinquished and replacement properties, and the FMV includes land which is not depreciated. And confused I am, after doing some internet research.

My thinking is leading me down the path of continuing the depreciation schedule of the building of the relinquished property as carryover depreciation as if the property was never sold and separately depreciating the building of the replacement property over 27.5 years. Where I am stuck is how to calculate the "Excess Basis" to depreciate for the building of the replacement building. Do I subtract from the value of the building of the replacement property the remaining un-depreciated basis of the building of the relinquished property, or do I subtract the value (cost) of the relinquished property's building at the time I bought the property?

Getting to the point of giving up and handing over my tax preparation to someone who professionally does tax returns that include real estate and 1031 exchanges.

Thanks again for your post.