1031 how good of a deal.

[Strongsilence-CPA]

Advantage is deferring the gain and income taxes. A disadvantage is paying costs (prep costs, cost seg studies, exchange costs, attorneys sometimes, your time) each time a 1031 is done. So, I'm wondering if the deferral if the tax savings is worth it after years of accumulated expenses.

My client deferred a gain from 2 real properties into 19 DSTs. This is time suck for me but will be a huge cost for the client.

[sjrcpa]

It all depends on the numbers.

For a 6 figure gain, or more, with intention to hold replacement property long-term I'd say it's worth it.

[BobKamman]

Does the owner of a McDonald's franchise complain "this is time suck for me" when he sees ten cars lined up at the drive-through to buy hamburgers?  If you want to complain about work, maybe you're not getting paid enough for doing it.  Talk to your boss. That's who gets to send the bills. 

But yes, people will pay a lot of costs and fees sometimes to defer or avoid paying a little tax.  Section 1031 has been around since the days of much-higher rates on capital gains.  (Depreciation recapture, though, might have been less back then.)  Each situation should be analyzed based on its own circumstances.  Smart clients will ask us to help with that, before making a decision.  But we all have our share of dumb clients.  

[Strongsilence-CPA]

Insightful.

"Smart clients will ask us to help with that, before making a decision". I'm sure he knows more than I do as he has been doing this for decades. So, in effect, I'm learning on his dime.

He intends to hold it and pass it to a daughter (without business acumen) via inheritance.  So the FMV step up is a factor and will be another tax benefit.

 If you want to complain about work

I'm my own boss and I talk to myself all the time.  He he.  He will pay me double my bill (he said) as he was extremely late getting me his stuff so I'm not complaining.

"Each situation should be analyzed based on its own circumstances,"

I'd like to move into an advisory role on 1031s and once I get the knowledge, I'll be looking for opportunites.

[Strongsilence-CPA]

Agree.

A replacement of 19 DSTs means the costs reduce the benefit.  I need to ask why he needed 19.

[BobKamman]

Hedging in a risky market?  Planned withdrawal, sell one every year until 2042?  But the best way to make money with DSTs is usually in marketing the package, not buying it from the promoter.  

[George4Tacks]

I just had one where the exchange was into TIC (Tenants in Common). After multiple years, one of the TIC sold off it's properties in 6 different states. Because of death of spouse in the interim, there was a step up in basis and all of the sales resulted in a loss and freed up some passive losses. 

You can looked forward to many years of nice billing and when you write yourself some nice notes on how to manipulate the software to do them in just a few minutes, you can smile every time you see the client. 

[Strongsilence-CPA]

George or Bob

I have a cost seg report did not allocate a value to land.  I don’t know if that is correct. A reason could be that all land has been developed (concrete, paving, bricks, sidewalks, etc.) This property is located in urban San Diego. The GoogleMaps satellite photo doesn't show any undeveloped land.  I hesitate to list no land due to risks of an audit.

[pkellycpa]

The land is still there isn't it? You need a new cost seg that differentiates between land and land improvements. Makes me wonder about the cost seg author.

[George4Tacks]

Did someone else do this client's return before you? Some preparer's do not list land and the cost segregation may have only been done on the improvements. Verify the original purchase cost. Get a copy of the original HUD-1. 

[Strongsilence-CPA]

"the land is still there" 

My client told me that the land is leased to the DST by an unrelated party.  That makes sense but I wonder why that isn't acknowledged on the cost seg report.

[Strongsilence-CPA]

Did someone else do this client's return before you?

Interesting.  The client exchanged into a DST in 2022 and the DST did a cost seg study that did not list land.  So, yes, it is possible that the cost seg provider wasn't provided info about purchased land but I don't have those tax returns.

The client thinks the land is leased to the DST by an unrelated party.

The client received 19 DSTs!  Seven of the DSTs did a cost seg study in 2022 and the end result for my client is 1.2 million in available bonus depreciation. This results in a NOL carryover of 1M. 

I'm thinking of the election to opt out of bonus depreciation for "smoother" future income and to avoid IRS scrutiny, which is a fear not based on much data. (CCH Answerconnect research service lists 9 tax cases from 1996 to 2021 in which cost segregations studies were cited.)

[TaxGuyBill]

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@Strongsilence-CPA wrote:

I'm thinking of the election to opt out of bonus depreciation for "smoother" future income

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Generally, people pay for Cost Segs because they WANT the deductions as fast as possible.  Often they want the money ASAP so they can pay down loans and/or invest the money into more investments.  You could even immediately make use of the NOL to get refunds back now. 

So you would definitely want to thoroughly discuss that with your client before electing out of Bonus.

[sjrcpa]

"I wonder why that isn't acknowledged on the cost seg report."

Because there was no land cost to segregate.