Like-Kind Exchange

[pmedders]

Need confirmation that I am figuring new basis of like-kind property for residential rental correctly. Facts:

Rental that client exchanged:

Purchased home in 1992 for $139.436, dep. $72,833, leaving an adj. basis of $66,603.

Closing costs for boths rentals plus exchange fee totaled $54,960.

Total new adjusted basis = $121,563



FMV of new residential exchanged = $869,000

Starker Services handled the exchange and the exchanged rental had a loan amount of $287,463, which was paid off and the proceeds of $283,884 was transferred from the first title company to the 2nd title company to apply to the loan for the new rental. Client paid an additional $17,000 to the title company for the new exchanged rental leaving a mortgage of $585,000.

What is confusing me is that I am showing a new adjusted basis of only $121,563. Should I input the mortgage of $585,000 into the figures; I thought it was only included if loan was assumed in exchange.

[jainen]

Ignore the mortgages completely.

Ignore the mortgages completely. As you said, it only matters if a mortgage is assumed, and that NEVER happens anymore, so ignore the mortgages completely.

You figured the carryover basis correctly, old adjusted basis plus transaction costs. Ignore the mortgages completely. Now add the new basis, which is the difference in FMV between the two properties. In other words, the amount Starker Services paid for the new property minus the amount they sold the old property for. Just remember to ignore the mortgages completely.

It's really pretty simple, as long as you ignore the mortgages completely.

[Bill Tubbs]

Ignore mortgages

All the gobbly-gook about mortgages in the instructions for like-kind exchanges are if the mortgages are assumed by the other party as a part of the transaction. Most transactions now-adays don't happen that way.

So, presuming you calculated the "Total new adjusted basis = $121,563" correctly (I'm too tired to check that right now)... I would think your new basis is $121,563 + $17,000 additional cash paid in = $138,563.

Bill

[jainen]

ignore the mortgages completely

>>new basis is $121,563 + $17,000 additional <<

Not $17000 more. The new property cost at least $250,000 more. It is not enough to simply ignore the mortgages. You must ignore the mortgages completely.

[Unregistered]

mortgage

I wouldn't say ignore the mortgage completely, figure the mortgage as cash given and cash received. You figure your adjusted base by adding the cash of $17,000 plus the mortgage that was taken out on the new property.

[jainen]

ignore the mortgages completely

>>$17,000 plus the mortgage<<

Total= $602,000. Is that the new basis of the acquisition property. What about the exchange basis of $121,563? Is it lost, or do you add it, or subtract it? Is that even the right amount, because if mortgage is like cash given or received, then you received $287,463 in mortgage relief on that side of the exchange?

The best worksheet is Form 8824 itself. It's really pretty simple, as long as you ignore the mortgages completely.

[Unregistered]

Exchange

I really wasn’t taking the step all the way in the answer. However, here is an example.

My exchange property cost me $200,000 and I’ve taken $100,000 in depreciation, this leaves me with adjusted base of $100,000. I exchange this for property that has a FMV (cost) of $400,000. The FMV (sales price) of my property is $300,000. In order to complete the exchange without reporting any gain on my property, I must come up with $100,000 to have the equity balance. So I either give the intermediary $100,000 cash or borrow (mortgage) $100,000 on the new property. In either case the other person gets his
$100,000 dollars plus my property.

My basis on the like-kind property is $200,000 and I my deferred gain is $200,000

Does that make sense?

[Gene V]

Mortgage

I agree with unregistered, to continue with his Example: lets say instead of $100,000 dollars mortgage, you take out $120,000 mortgage on the new property, (remember all of the money from the mortgage company goes directly to the intermediary) Now, when the exchange is completed, the intermediary company transfer the title for the new property to you along with an check for $20,000.

You now have a base in the new property of $220,000
Your deferred gain is $180,000
In addition, you have a RECOGNIZED GAIN of $20,000.

If any body does many 1031 exchanges, I would suggest you buy the software from CFS call Tax Tools, It has an excellent like-kind exchange worksheet and calculator.

So the question is, does the mortgage make a difference, when calculating the BASIS of like-kind property received?

[jainen]

Ignore the mortgages completely

>>So the question is, does the mortgage make a difference<<

Apparently you missed it when I provided the answer, so I will repeat it. Ignore the mortgages completely.

[Bill Tubbs]

Why not the $17,000?

>>Client paid an additional $17,000 to the title company for the new exchanged rental <<

Isn't additional cash put into the exchange an increase in basis?

Bill

[pmedders]

Like-Kind Exchange

So, if I am to ignore the mortgage completely (there seems to be dissension on this point), my carry-over basis would be $121,563. The new basis would be $254,000 ($869,000 (FMV) for new property less $615,000 (FMV) for exchanged property.

When would it be advantageous to elect, for depreciation purposes, to treat the adjusted basis of the exchanged property as if disposed of at the time of the exchange and treat the carryover basis and excess basis for the acquired property as if placed in service the date you acquired the exchanged property? It seems it would be an easier process.

[jainen]

Yes, it is easier

Yes, it is easier to do and easier to explain to the client. But you can easily imagine times when it would not be so good. Suppose you are tired of being a landlord and are trading down--you take out taxable boot and there is no new basis. Wouldn't it be better to depreciate straight-line over the remaining, say, ten years, instead of spreading it out over a new 39 years?

[Unregistered]

time limit on like kind property

I know this is unrelated to this basis issue,how long do you have to keep the property
received in the exchange to retain the nontaxable treatment. Example, you trade one
rental for another rental, but at some point taxpayer wants to convert 2nd rental to
his home.

[JJ EA]

Basis new property

As Gene said, CFS Tax Tools has good worksheets for the 1031 exchange. I put the numbers as given into that worksheet and also checked it by using a worksheet from a Gear Up seminar. The basis for the new property should be 436,100. Another way of looking at it is: What did he give and what did he get?
Gave:
66,603 basis old property
17,000 cash
54,960 cost of exchange
585,000 new mortgage
------------
723,563

Got:
869,000 FMV new property
287,463 old loan paid off
--------------
1,156,463

Difference of 432,900 is realized gain deferred.


Basis of the new property is:

869,000 FMV of new property:
(432,900) Less deferred gain:
--------------
436,100

[Unregistered]

think i'll buy the software 8-)