Discussion:Three questions from my 1031 exchange

1) Calculation of New Basis

I have Form 8824 worksheets from Jensen Burcham Stelmack Edwards in Longmont, Colorado, http://www.1031exchangeservices.net/1031worksheet.pdf, and http://www.1031cpas.com/documents/Form8824WorksheetNOHeader_001.pdf. The first yields a new basis "total to Form 8824 Line 18" of $392,932.20, the second yields $392,932.20 officially but has a "crosscheck" calculation of $361,997.73, and the third gives $361,997.73. I'm more than a little nervous that the worksheets yield different numbers for my case but not example cases, and can't find my error. The two methods of calculating basis seem to be:

$392,932.20 = [adjusted basis, relinquished] + [additional equity] + [exchange expenses, relinquished] + [exchange expenses, replacement] + [debt, replacement – debt, relinquished]

$361,997.73 = [adjusted basis, relinquished] + [exchange expenses, replacement + exchange expenses, relinquished] + [purchase price, replacement – sale price, relinquished]

and the difference between the two methods in my case is:

$30,934.47 = [exchange expenses, relinquished] + [exchange proceeds toward exchange expenses] - [interest on exchange proceeds] + [tax proration, relinquished]

One CPA suggested I misreported my additional equity, and he wanted to change it so that the two methods of calculating the basis come out the same, but I actually paid that amount of cash toward the purchase price of the replacement properties. Any thoughts as to how I should calculate basis?

2) Negative Basis

I have several replacement properties, and I divided the old basis among the replacement properties according to the percentage of exchange proceeds that went toward each property. With this method I end up with a negative basis for one of my properties. This is because that replacement property has no debt, and its portion of old adjusted basis + its portion of exchange expenses + cash is less than its portion of debt from the relinquished property, assuming the first ($392,932.20) method of calculating basis. I can't have negative basis, as instructions on Form 8824 tell me to "reduce the sum of the above amounts (but not below zero) by any exchange expenses you incurred." The problem is, it seems I don't have enough exchange expenses, much less any to discard; I would make the basis = 0 by discarding some of its portion of debt from the relinquished property. If I were to do this, I increase the basis on the sum of my exchange properties. Should I use some other method of dividing up the relinquished adjusted basis, relinquished debt, and exchange expenses so that my net basis is the same as the sum of the individual replacement bases, or should I just increase the net basis by throwing away some exchange expenses?

Does it make sense to have a basis of 0 for a property that inherits the greatest share of the old basis?

Another way to think about this: If my replacement properties had a net debt of 0, little cash toward the purchase price, and a smaller amount of exchange expenses than debt on the relinquished property, I would be trading down and receiving cash boot.

3) Prepaid Taxes

For one replacement property the lender required that I prepay 14 months of property taxes. Do I deduct them all in 2005, even though only two months were intended for 2005?

The regs at 1.1031(j)-1(c) provide the treasury method of allocating basis among multiple properties. This method does not seem to recognize any effect of differing debt on the replacement properties. This seems like a major flaw.

As far as 2) is concerned, I wonder if the debt reduction can be considered boot.

1) Formula provided by Reg. Sec. 1.1031(d)-1. I'll take a look. I just did a Form 8824 worksheet by Gear Up / PPC 2005, and it yields the same basis as the Jensen Burcham Stelmack Edwards worksheet. I'm gaining confidence toward this conclusion, but all it will take to break my confidence is another CPA telling me I'm wrong.

2) Thanks! I think I'll have to do something nonstandard here. I'm considering reallocating the relinquished debt such that the basis of each replacement property is at least as large as its portion of the old basis, as calculated from the percentage of exchange proceeds it receives.

3) As to the the third question, I've found that I can include on Schedule E taxes paid from a lender's impound account if they appear on Form 1098.

As for 2) there is no net boot, and out of curiosity I did some worksheets and showed that even with the negative basis calculation, there is no boot on the replacement properties calculated individually. What there is instead is a positive "net liability."

Can you provide the numbers for your situation: original basis, selling expenses, liabilities, replacement costs, etc?

What about the possibility of some sort of tracing on the debt. Allocate an imputed debt to each property based on the exchange percentages and consider the actual encumberance irrelevant.

http://odysseus.anderson.name/mikela/non-site_files/Mike_Anderson_cost_basis_worksheet.xls

I trust Excel files can be read by all spreadsheet applications--I created this one in OpenOffice. I would have uploaded the file to this site but I didn't feel comfortable signing away my rights to Intuit. I may eventually decide to delete this file.

One shortcut method to use to arrive at replacement basis, or to use as a cross check is:

FMV of Replacemnt Prop. 929,550 less gain deferred -535,780 equals AB of replacement prop = 393,770

This is the method used to arrive at basis for 1033 replacement property and it works for 1031.

didn't get a chance to go closely through your methods for allocating basis to replacemt properties. But I see where the trouble arises. Lots of properties, some with, some without debt, not much of property relinquished.

I think you have to allow basis for debt on the replacement properties, ie must allocate that portion of purchase price to that property. Otherwise, if you sell property later, the consideration received from debt relief would not be dollar - for dollar, I see your methods follow this. Your various methods come out pretty similar, not alot of difference one from another.