Discussion:1031 Allocation Issue
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| 29 March 2007 | |
| Client had 1031 with multiple replacement properties (one group), allocated deferred gain correctly per reg 1.1031(j) by FMV of all properties in group. Several properties had high recourse debt (new loan), as allocation was based on FMV, these properties show negative tax basis, i.e. loan exceeds tax basis on property. Is there any other way to allocate the deferred gain within IRS Regs e.g. FMV less debt (equity) so that encumbered properties take less gain and show positive net tax basis?
David | |
| 29 March 2007 | |
| didn't the new debt get allocated to each property correctly? Didn't the new debt increase the basis? | |
| 30 March 2007 | |
| Here are the numbers:
Original Basis Property A:$ 10 Sales Price $100 Deferred Gain $ 90 Replacement Property B - FMV: $ 150 Property C - FMV: $ 50 Debt $ 100 Debt $ 0 Equity $ 50 Equity $ 50 Allocate Deferred Gain (FMV) $ (67.5) (FMV) 50/200 $(22.5) Property Basis $ 82.5 27.5 Debt > Basis (Negative) $ (17.5) 0.0 The reason the negative basis is an issue is because the Property B was organized as an LLC, and the capital account is negative. Thanks | |
| 30 March 2007 | |
| Here are the numbers:
Original Basis Property A:$ 10 Sales Price $100 Deferred Gain $ 90 Replacement Property B - FMV: $ 150 Debt $ 100 Equity $ 50 Allocate Deferred Gain (FMV) (150/200) $ (67.5) Revised Property Basis $ 82.5 Debt > Basis (Negative) $ (17.5)
The reason the negative basis for Property B is an issue is because the Property B was organized as an LLC, and the capital account is negative. Thanks | |
