Like Kind Exchange - form 8824

[jlew1229]

A new client sold a rental property and did a like kind exchange for a new property- Actually 2 new rental properties .  

I have the Form 8824 from the previous tax preparer.   The deferred Gain was $1,155,733 (line 24) and the basis of the like kind property received is $898,848.00 (line 25)     (Line 19 was 1,329,304 and line 23 was 173,571) 

From the instructions for form 8824, line 25 is the basis for the (2) new properties.  I

How do I account for the deferred gain of $ 1,155,733 in Lacerte?    It is more that the basis on line 25. 

Thank you in advance for your help.

[sjrcpa]

The purpose of a like kind exchange is to defer the gain.

You don't account for the deferred gain anywhere. Ir will be realized  if and when the propert(ies) are sold.

[pamdory]

The deferred gain adjusted the basis of the new asset so that it is lower than the actual value.  When it is sold the lower basis will mean a larger gain is recognized.  

But you may want to check to see if the property given up in the exchange was in a different state than the properties acquired.  Due to claw back provisions, many states require an annual filing showing that you haven't sold the new property because when it is sold they are entitled to the tax on the deferred gain.

[sjrcpa]

i.e. California

[TaxGuyBill]

Are you referring to depreciation on the new property?

It depends on if you make the election or not (1.168i-something).  One way is that you depreciate the new Basis using the new placed in service date.  The other way is that you continue depreciating the old property using the old Basis and old placed in service date, PLUS you depreciate the 'extra' amount for the new property using the new placed in service date.

[jlew1229]

I so understand it is a deferred gain.  My questions was more on if there was a place to put the fact that the deferred gain is actually more than the basis that was determined on form 8824.  For the future when and if the replacement property is sold.   The previous accountant did not put an asset on the books.  I am assuming because 898,848.00 - 1,155,733 is a negative number.    

Other than a note on the inside of the folder.  If the client goes to a new tax preparer in the future, how are they to know that what this deferred gain was.  

[jlew1229]

Sorry, I meant I do understand, not  so understand.   

[George4Tacks]

It is not necessary to report the deferred gain. That amount is built into the basis. If the property sold today for $2,000,000 the gain would be $2,000,000 - 898,848 = 1,101,152. Depending on the election made there will be some depreciation recapture. but the deferred gain is NOT part of the determination of gain in the future. 

If you are a CA preparer, then form 3840 must be filed with EVERY RETURN IN THE FUTURE until the asset is sold. If that is the case, the deferred gain is shown, BUT SO WHAT? The basis is the key number. 

[pamdory]

@George4Tacks am I remembering  correctly that if the disposed of asset was in CA (or any other state with claw back rules) and the acquired asset is in another state, CA is only entitled to the deferred gain as determined at the time of the exchange, but not any additional gain since then?  If so, then the there is a reason to keep track of the deferred gain amount.

But I could be delusional about that.  It's been a bit since I've dealt with someone selling cross state asset with deferred gain.

[jlew1229]

But what happens to the unrecognized gain from the first sale.  Why is it not considered part of the sale of the 2nd piece of property.  The client actually had a gain on the first sale, but never paid taxes on it.     I thought this would be rolled into the $898,848.00.  

The original sale was for 2,228,152.  The basis at that time was $898,848.  Creating a realized gain of $ 1,329,304.  They only recognized $173,571 gain on the original sale, deferring $ 1,155,733 of a gain until a future date.     Does this 1st unrecognized gain (1,155,733) never get taxed?  only the gain from the 2nd sale?     

I thought the gain from the first would reduce the basis of $898,848.00 and that is how it was accounted for.  So, 898,848.00 - 1,155,733 = $-256,885.00.  If the replacement property was eventually sold for 2,000,000 the gain would be 2,256,885.00?   incorporating the gain from the first and second sale.  But from the replies I am getting, my calculations are not, correct?   

[PhoebeRoberts]

My original basis is $900k. When the property is worth $2.23 million, I swap it for a different property worth $2.2 million. $1.3 million of of gain is deferred. The new property is worth $2.2 million, but I don't have $2.2 million in basis - I only have $900k in basis, because of the $1.3 million in deferred gain.

If I then sell the new property for $2.2 million, I don't have $2.6 million of gain - I have the same $1.3 million in gain. If it actually decreases in value to $2 million, I have only $1.1 million in gain - the same as if I still owned the original property and sold it for the same $2 million.

[TaxGuyBill]

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@jlew1229 wrote:

the basis of the like kind property received is $898,848.00 (line 25)

I thought the gain from the first would reduce the basis of $898,848.00 and that is how it was accounted for.  So, 898,848.00 - 1,155,733 = $-256,885.00.

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The $898,848 on line 25 is the already reduced Basis.

The Basis of the new property BEFORE the Exchange is the likely the FMV on line 16 (some of the other lines may be factored in when calculation line 25).

[jlew1229]

 So the deferred gain on the 8824 line 24 is informational only?   Never plays a role in a capital gains calculation if the replacement property is eventually sold without a 1031 exchange.   

What is the purpose of line 24 then?