Sale of 1031 exchange Home

[POCAHONTAS]

Client purchased home in a 1031 exchange in 2004, rented it for 4 years and then moved in to it, and then sold it in 2014. His 2004 tax return show a 165,233 deferred gain.

How do I report this on his 2014 tax return?

Thanks you

[POCAHONTAS]

Any one Please

[taxea]

Have you researched the rules?

[jimmcg]

Sec 1031

This can be a complex area. As previous poster implied research Sec 1031. Many good examples in the pubs.

[Roland Slugg]

The rules are straightforward, and there is nothing complex about them. The T/P's basis in the property he received in the 2004 exchange is the same as his adjusted basis in the property exchanged, decreased by the money received and increased by the gain recognized, if any. (Regs 1.1031(d)-1(b)) If money was paid, basis is increased by the amount paid. (Regs 1.1031(d)-1(a))

The deferred gain of $165,233 from the 2004 LKE is not relevant, per se, but since it served to keep the basis in the replacement property low, it could mean that the recognized gain on the property's 2014 sale could exceed the §121 excludable maximum of $250k (or $500k).

Depending on what tax prep software you use, you might enter the sale of the residence information on a worksheet that's part of Schedule D, F-8949, or some other input form. In any case, the depreciation taken after May 6, 1997 doesn't qualify for exclusion, even if the T/P otherwise qualifies for the §121 exclusion. (Code §121(d)(6)) There should be a place to enter that depreciation on the "Sale of Residence" worksheet in your tax prep program. In fact there should be fields to enter all the depreciation taken as well as just the post-May 6, 1997 depreciation. If the former property dates back prior to May 1997, the two depreciation amounts will be different; if it was acquired after May 6, 1997, the two depreciation amounts will be the same.

All the post-May 6, 1997 depreciation will be "Unrecaptured §1250 Gain" and may be taxed as ordinary income but at a tax rate no higher than 25%. Watch for this when you review the completed return. That post-May 6, 1997 depreciation, btw, will include depreciation taken on the previous rental property between May 7, 1997 and the date it was traded in that 2004 LKE.