1031 exchange Depreciation

[akumarps]

Hi experts,

I did a 1031 like kind exchange in 2022. Below are the details:

1. Relinquished Property: Sale Price: 212,500, Remaining Mortgage 43,000, Purchase Price: 69,000; Cash down: 19,000 and loan: 50500: Cumulative Depreciation: 14,000 and Cumulative Losses: 5350

2. New property: Purchase Price: 357,500; down payment: 150,000 and Loan: 207,500

Exchange Expenses: 15926

My Question is if after electing out from Reg 168 and elect one asset, what will be my Basis or cost for depreciation.

[Dusty2]

Looks like a question from a class.  What do you think it is?

[akumarps]

Its not really a question from class. I am struggling to figure out the right amount. If I didn't an exchange, I will be taking a depreciation on 357500- land value. However, after filling out the smrt worksheets on 8224, I get only 181000 on line 25 which goes on Basis or Cost on Asset Entry form of new property.

[rbynaker]

Not something I see very often but to me the first step is in getting a transaction that balances.  I cringe whenever folks use the terms "sale price" and "purchase price".  1031 is for EXCHANGES.  So taxpayer gave up x in exchange for y.  That means x = y.

Gave up:

$212,500 value of property
$150,000 down payment
$207,500 note payable

Received:

$357,500 value of property
$ 43,000 mortgage pay-off
$ 15,926 of exchange fee "value"

x != y

[Norman2001 · Accepted solution]

It's not clear to me what is happening with the mortgages. If your client is paying off the old mortgage, then taking out a new morgage for the acquired property, I think the basis calculation is straigtforward. 

The basis of the acquired property is reduced by the deferred gain. And, its basis is increased by the exchange expenses.  

For your problem (assuming mortgages are paid off, not transferred)

Old property 

Purchase price = $69,000

Depreciation = $14,000

Adj Basis = $55,000

Gain = $212,500 - $55,000 = $157,500

Realized Gain = $157,500 - $15,926 = $141,574

New Property = $357,500

Basis Adjustment = $141,574

New Property Basis = $215,926

Any suspended losses transfer to new property 

[akumarps]

Thanks Norman2001. Although I accepted the solution, however, mortgage for old property was paid off as escrow and for new property took a loan of 207,500.

[akumarps]

Hi Norman2001, do I need to reduce the cost of land from this new property basis of 215926 to calculate depreciation on combined basis

[Norman2001]

Yes.  Allocate the basis reduction to both land and improvement. 

[Norman2001]

I'm not sure how to answer you.  The calculation I gave you assumes:

Your client paid off the mortgage on the old property.  That is, ithe mortgage didn't transfer to the new owner as part of the exchange.

and

Likewise, your client didn't acquire a mortgage as part of the exchange. In other words, he had to take out a new mortgage to help pay for the new property.  

[akumarps]

 I think you just answered. thanks for your help.