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Discussion:1031 Exchange land value

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Discussion Forum Index --> Tax Questions --> 1031 Exchange land value


Actionbsns (talk|edits) said:

22 March 2014
My client sold a condo and bought a rental home in a 1031 exchange. The adjusted basis for the new asset is $48,013. When I checked the property tax site, the land is valued at $155200 and the building is valued at $270800. How do I calculate the value of the land and the value of the building for depreciation?

Ckenefick (talk|edits) said:

22 March 2014
Check the yellow box.

Nilodop (talk|edits) said:

22 March 2014
Every time I see this advice given, I enter a check mark in the yellow box. But nothing happens. But I still do it. Maybe it will work one day.

Actionbsns (talk|edits) said:

22 March 2014
OK, that doesn't work, so are there any better suggestions?

Nilodop (talk|edits) said:

23 March 2014
I was being facetious. It works.

Ckenefick (talk|edits) said:

23 March 2014
I'm pretty sure it works, I've answered the same question at least three times.

Actionbsns (talk|edits) said:

23 March 2014
Whatever search terms you are using aren't the ones I'm using. Perhaps someone who hasn't answered the question three times has another suggestion. Or, possibly provide better search terms for the yellow box. I've never done a 1031 exchange so I've never needed to check on any issue related to it.

Joan TB (talk|edits) said:

23 March 2014
Paula, The whole purpose of the 1031 exchange is to not recognize gain when you relinquish the old property. The basis carries over to the new property. Assuming you have calculated the basis correctly (taking into account boot, etc.) firstly, you cannot depreciate more than your basis of $48,013. Of course, the trick is allocating that $48K between land and buildings. Even if you had an actual appraisal, it probably won't split the value between the land/buildings, and it certainly wouldn't have a total of $48K. In a lot of similar situations, I use the RATIO of land-to-building from the property tax value to allocate the total basis (in your case, $48K). Since your basis is actually quite small, maybe that is reasonable enough for you, too. So your answer would be 36% ($155,200/$426,000) to land, 64% ($270,800/$426,000) to building. The answer is $17,285 = land, $30,728 = building. This gives me an answer, and I can move on.

Actionbsns (talk|edits) said:

23 March 2014
Thanks Joan. I was doing some research on Google, and discovered I had a piece missing. There is also excess basis, and with that in the equation, the relationship between what I already had, the property tax ratios, and the excess basis makes more sense. I was worried about the huge discrepancy between the assessed values and the new adjusted basis.

Ckenefick (talk|edits) said:

23 March 2014
Not sure if "excess basis" really has anything to do with the land/structure allocation. That is more of a future depreciation issue. Not so sure the actual "discrepancy" which concerns you is the important thing here. The absolute dollars per the property appraiser's records will never jive with the basis to be allocated, even in an outright purchase. And in your case, not that it matters, you haven't told us what the "purchase price" was for the replacement property. But likely, it wasn't $426,000 exactly.

What Joan's methodology does is preserve the "built in gain" in each asset class as fairly as possible. Yes, you will wind up, for each asset class, with FMV far in excess of basis. But, that FMV/Basis difference isn't lop-sided in favor of one asset class. It is all relative.

Doug M (talk|edits) said:

23 March 2014
I was thinking this thread is about the following:

Property given up has no land basis. Reg's say old basis remains on books and boot basis takes on new character.

But, replacement property has land. Under the 1031 reg's, what is the election needed to file so that the new property can allocate according to land/building ratio?

Ckenefick (talk|edits) said:

23 March 2014
The property given up should have land basis, absent the circumstance of the HOA not owing the common elements. And even if the relinquished property didn't have land, we have land now...

Actionbsns (talk|edits) said:

23 March 2014
I think it's something like 1.163, or thereabouts, I have some information on that at my office. You have to make an election on the 4562.

Ckenefick (talk|edits) said:

23 March 2014
163 is interest, 168 is depreciation. It's the -6 of 168(i). If you elect out of the Regs, you would attach a statement.

Doug M (talk|edits) said:

23 March 2014
Laura: the reg's state that if this was a straight across trade, no exchange expense and no boot, your depreciation schedule would remain unchanged.

Your OP does not tell us if there is an increase to the basis of the replacement property. What I call the boot basis (increase in basis as a result of boot, exchange expenses, etc) takes on the character of the L/B ratio of the replacement property.

Ckenefick (talk|edits) said:

23 March 2014
I think Laura is calling that the "excess basis."

Kevinh5 (talk|edits) said:

23 March 2014
Laura, if there will be net boot paid allocate it to the land in the same proportion as the FMV of the land to the total FMV of the property.

e.g. $15,000 net boot paid.

Replacement Land worth $250,000, building worth $100,000, total FMV of replacement property = $350,000

15000 x 250,000/350000

Wiles (talk|edits) said:

23 March 2014
...even if the relinquished property didn't have land...

Say what? Land-less real estate? Whoa! Trippy! ...I think I see a triple rainbow.

Ckenefick (talk|edits) said:

23 March 2014
It was a condo. No idea if Action booked up land or not.

Nilodop (talk|edits) said:

23 March 2014
My client sold a condo and bought a rental home in a 1031 exchange. We are all assuming this condo was rented out, not the client's personal residence. Just askin'.

Spell Czech (talk|edits) said:

23 March 2014
In my few years of watching, I've never seen a condo with that kind of appreciation. Or had it been depreciated over many many many years? Is there possibly a new mortgage that's missing from the exchange and basis calculations? Is this where the "excess basis" fits in and makes things seem less unreasonable? We've got all the numbers except that one...

Ckenefick (talk|edits) said:

23 March 2014
Probably a combo. She said there's excess basis, so taxpayer paid some boot.

Actionbsns (talk|edits) said:

23 March 2014
My client bought the condo in about 1997, I'm not in my office but I've worked on these numbers so much in the last few days, these should be realistic. Anyway, they paid $122,000 for the condo, always a rental. They sold it for $445,000, received a check for $16,000 after the close of the new property, exchange costs are $30,000 and change, adjusted basis of the condo is about $52,000. The new property was purchased for $395,000. I have an exchange basis of right around $48,000, deferred gain is around $360,000 so, as I understand it, the excess basis is $360,000 plus boot of $16,000, less the exchange basis of $48,000, total excess basis is $328,000 and depreciable over 27.5 years. Assessed value of the land is 36.5% of the total assessed value. There are 11.5 more years left on the original depreciation of the property. There are no mortgages on either property.

Doug M (talk|edits) said:

23 March 2014
Your client purchased lesser value replacement property.

There is no excess basis. (boot basis)

Your client received boot of $50,000 reduced by exchange expenses of $30,000. Taxable cap gain of $20,000. You have $16,000. Could be "rounding" and/or R/E taxes, other non-basis issues on closing statements. Security deposits, rent pro-rates, etc.

Basis of property given up = basis of replacement property.

Actionbsns (talk|edits) said:

23 March 2014
Doug, can you explain to me what Excess basis is then? From the articles that I read, it seemed that I understood it, but I don't think I do. It also sounds like prior to reading the articles on Excess Basis, I had it right, bottom line is Basis of property given up = basis of replacement property. The only depreciation we have available is the $48,000 which is split between land and building and has 11.5 years left to be depreciated. We cannot depreciate the $328,000.

Belle (talk|edits) said:

March 23, 2014
Paula - check your email.

Ckenefick (talk|edits) said:

23 March 2014
We cannot depreciate the $328,000.

Say what?

Ckenefick (talk|edits) said:

23 March 2014
Doug, can you explain to me what Excess basis is then?

It's above and beyond the exchanged basis. Let's say you have $0 basis property worth $10k. You exchange it for property costing $100k. You will have to come to the table with $90k in cash to complete the transaction.

Yeah, I agree with Doug. You have an issue with this transaction. You traded down.

Doug M (talk|edits) said:

23 March 2014
Excess basis, most commonly, will be created if your client:

1. Assumed more debt than the debt on the property given up 2. Came up with personal cash to close the transaction.

Your client came up with neither. Your client walked with $16,000 in cash at the end of the day.

On a simple basis, use the following idea in determining the basis in the new property:

Net book value of old, plus boot paid.

Your clients new basis is $48,000 (you mentioned $52,000 later on) + -0- = $48,000

Actionbsns (talk|edits) said:

24 March 2014
We cannot depreciate the $328,000.

Say what?

Chris this is confusing. I think I'm using the wrong term for the $328,000, it's not excess basis, but your comment leads me to believe it is part of the depreciable basis. Is my comment about the $48,000 being depreciated over the remaining 11.5 years and the $328,00 over 27.5 right?

Thanks everyone for your help, I do appreciate it.

Ckenefick (talk|edits) said:

24 March 2014
Right, wrong term. Excess basis is "additional" basis that arises in a 1031 for the reasons outlined by DougM. If it's depreciable, you depreciate it. In your case, you traded down. Client put in $0 add'l cash and there no debts were involved.

You're generally gonna have a carryover basis, with maybe a few modifications. We don't have the details on the "exchange expenses," but surely, we have some pro-rations and maybe some prepaids, which will be boot.

Nilodop (talk|edits) said:

24 March 2014
Probably a combo. Wow, my first combo condo.

Doug M (talk|edits) said:

24 March 2014
Is my comment about the $48,000 being depreciated over the remaining 11.5 years" Yes

$328,00 over 27.5 right? No. You have nothing here to depreciate. These is no boot paid or add'l debt incurred.

I don't think the exchange expenses play into this scenario. That would only be true if your exchange expenses exceeded the boot received. In your case, you received more out of the exchange than the exchange expenses.

Old basis = new basis

PVVCPA (talk|edits) said:

March 25, 2014
It should also be noted that the "old basis = new basis" presentation would include a change. Since there is gain recognition, this gain will be recognized as Sec 1250 recovery (most likely). Therefore, there should be both a reduction in the cost basis and reduction in the accumulated depreciation equal to the amount of gain that has been recognized.

Actionbsns (talk|edits) said:

25 March 2014
This property has been depreciated using straight line, does Paul's comment still apply?

Ckenefick (talk|edits) said:

25 March 2014
No, he meant unrecaptured Sec 1250 gain.

Actionbsns (talk|edits) said:

25 March 2014
Bless you Chris!!! I was just coming to that conclusion, but I now have about 12 more pages of stuff all over my desk. I really want this fricking return to be done.

PVVCPA (talk|edits) said:

March 25, 2014
Yes, replace "Sec 1250 recovery" with "unrecaptured Sec 1250 gain". Sorry, I thought I was talking to a client. The point of my post was to make sure you reduce the cost basis and accumulated depreciation by this amount.

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