Passive Loss

[Maria]

Hello,

My client did 1031 exchange in 07 with realized gain being used to reduce the basis of new property. However, there was $13,000 passive loss in the old property what should I do with that. My feeling is it becomes carry forward for the new property but my manager said it could be basis of the new property. I don't think so but couldn't find my prove.

Thanks.

[solomon]

Did your manager cite an authority for his/her position?

[jimmcg]

Hello,

My client did 1031 exchange in 07 with realized gain being used to reduce the basis of new property. However, there was $13,000 passive loss in the old property what should I do with that. My feeling is it becomes carry forward for the new property but my manager said it could be basis of the new property. I don't think so but couldn't find my prove.

Thanks.

Had one a few years ago and as I recall suspended losses can first be used to offset any boot on the exchange and any remaining gets carried forward with the replacement property. As for a cite as authority I don't have time to check it now but I am sure a perusal of the regs will produce it.

[veritas]

See page 7-10

in TTB. Planning tip

[solomon]

The adjustment to basis in your post of the described 1031, your manager's position, I believe lacks authority.

§469(j)(6) permits a basis adjustment for a suspended loss but this is in the context of a gift.

§469(j)(12) also permits a basis adjustment on a distribution from an estate or trust.

§469(g) prevails - namely, a disposition in a fully taxable transaction allows the deduction of a suspended loss. As jimmcg noted, if there were boot received that would apply to the boot.

[Davc]

§469(g) prevails - namely, a disposition in a fully taxable transaction allows the deduction of a suspended loss. As jimmcg noted, if there were boot received that would apply to the boot.

A 1031 is not a fully taxable transaction so do you have another cite allowing the loss to be applied to the boot received?

[solomon]

A 1031 is not a fully taxable transaction so do you have another cite allowing the loss to be applied to the boot received?

§1031(b) addresses boot as full recognition - which I take to mean that portion is a fully taxable transaction. Here is how an exchange specialist does it:

How or when is boot recognized in an exchange? The two most common examples are cash received at the closing of the property being sold or cash received at the end of the exchange because the real estate owner purchased a less expensive property. An example illustrates how this would work. A real estate owner decides to sell his rental property for $500,000. He has a tax basis of $100,000 and $50,000 of suspended passive activity losses. If he simply sold the property outright, his $400,000 gain would be reduced by the $50,000 of PALs, leaving him with a $350,000 taxable gain. If he opted to do a 1031 exchange, he could arrange to receive $50,000 at the closing, exchange the rest and fully defer the gain. The $50,000 cash boot would be taxable, but it would be reduced by the $50,000 in PALs resulting in no gain being recognized.

[Davc]

§1031(b) addresses boot as full recognition - which I take to mean that portion is a fully taxable transaction. Here is how an exchange specialist does it:

Here it is:

1031(b) GAIN FROM EXCHANGES NOT SOLELY IN KIND. --

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

Note the limitation which means a partially taxed transaction. Does the specialist have a cite supporting his position?

From the IRS at: http://www.irs.gov/businesses/small/...146336,00.html

Fully Taxable Transaction

In a fully taxable disposition, all gain or loss is realized and recognized in the current year.

An exchange of the taxpayer’s interest where all gain or loss is not recognized does not trigger suspended losses, (such as transactions governed by IRC § 351, 721 or 1031). To the extent the taxpayer has recognized gain on the transaction, that income generally is passive and may be entered on Form 8582, triggering passive losses.

Transactions that are not fully taxable events include:

* Likekind exchanges – IRC §1031
* Conversion to personal use
* Gift (donor’s suspended losses added to basis, no loss deduction allowed to the donor in any year - IRC § 469(j)(6))
* Transfer of the activity to a corporation, partnership or LLC
* Bankruptcy that has not been finalized. Simply filing for bankruptcy is not a qualifying disposition.