In 2004 my client exchanged rental property A for rental property B. Now she wants to exchange B for C. The basis for B is 250,000 (or $300,000 with 50k of depreciation claimed on house A built into it). House B will sell for $600,000. House C will cost $400,000. So I think she pays tax on $150,000 ($400,000 less $250,000). This $150,000 is taxes as follows: $100,000 at cap gains rate and $50,000 at unrecatured 1250 gain rate, 25%). Am I correct?
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1031 exchange
Mark, CFS Tax Tools has a calculator for this purpose.
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Like Kind Exchange - Boot Received
The transaction you describe has her selling House B for $600,000 and purchasing House C for $400,000 in a like kind exchange. That means she is receiving $200,000 boot (cash) in the transaction. An outright sale of House B produces total gain of $350,000 ($600,000 sale price minus $250,000 basis). Under like kind exchange rules, you have to recognize and pay tax on the lesser of the boot received or the realized gain [section 1031(b)]. So the lesser of these two in your case is $200,000, the cashed received. That means you have $50,000 of unrecaptured 1250 gain (25% rate) and $150,000 of section 1231 gain (long-term capital gain rates) to pay tax on in the year of the exchange. Basis in House C after the transaction is $250,000 basis from House B, plus $200,000 taxable gain in year of exchange, for a total of $450,000. The like kind exchange rules allow her to defer tax on $150,000 of the portion of gain from the sale of House B.Comment
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Thanks
Bees, as always thanks for your help.
MarkComment
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