1031 Exchange

[Deltax]

Client sold rental house in exchange for rental condo.
original basis for house=$59000. Everything depreciated
House sold for $260,000.
cost of rental condo $220,000.

The question is ;what should be the basis of the rental condo for depreciation

Thanks

[jainen]

$40,000 taxable gain

Depreciable basis of condo is zero and taxpayer has $40,000 taxable gain.

[Bill Tubbs]

Land?

Client sold rental house in exchange for rental condo.
original basis for house=$59000. Everything depreciated

Was any of the original basis allocated to land? If not, then agree with Jainen. If there was though, then the basis of the condo is the basis the land was.

Either way, taxpayer has $40k gain.

Bill

[Matt Sova]

I third that opinion

Just in case you wanted one.

[Deltax]

Thanks Guys. The only problem is that my client will go ballistic because he did not believe me when I told him.

[jainen]

go ballistic

I agree about the land. If you can find ten or fifteen thousand that was not depreciated, transfer it to the condo. The condo has some land value too, but you allocate the transfer basis so most goes to the building. The exchange allows him to squeeze out the last bit of depreciation he couldn't reach before. That's no reason to go ballistic.

You have to present the figures as quite positive. Trading down is one of the most useful and least-understood exchange techniques. It allows the client to acquire a more maneageable property while pulling out significant cash. He is only taxed on the cash, which means he is saving $33,000 in federal taxes! And that is in addition to the $15,000 savings he already took through depreciation--one of the best double-dips in the tax code! If his long-term plan is to live in the condo, trade into something else, or leave it to his heirs the savings can be permanent.

[Matt Sova]

Savings can be permanent

Not if he turns it into personal residence and then sells the personal residence after occupying it for 2 years. The depreciation recapture is still out there, albeit only for depreciation after 5/7/97. The only way it can be a permanent tax savings is if it, or future property it is 1031'd for, is left for the heirs.

Matt

[jainen]

upbeat possibilities

>>The only way<<

Ultimately the heirs usually get it all, so permanent means deferred until I die. But there are other ways that the savings can be locked in permanently without dying. One is to suffer an uninsured casualty loss, and another is to sell it after the market crashes. More upbeat possibilities are charitable donation, installment sales when taxable income is zero, sales against capital losses or suspended passive losses that would otherwise be unusable, and trade for stock in a corporation.

Section 1031 is one of the most important and useful parts of the tax code. It lets you channel your taxation into the time frame and amounts that you want.