Like-Kind Exchange Depreciation Recapture

[Snaggletooth]

If a like-kind exchange is made with only a few dollars boot, is there depreciation recapture?

Building original cost $40,000, fully depreciated. Original cost of land, $9,000.

Property to be exchanged with real estate valued at $190,000 plus they will receive $5,000 in cash.

Capital gains to be limited to $5,000 with the remainder of the gain deferred into new property.
Does the $40,000 of depreciation need to be recaptured as well?

[Burke]

What is the actual total gain on the transaction? You didn't say how much was deferred.

[Golden Rocket]

It depends

It depends (my favorite answer to all tax questions).

The total gain depends on whether or not depreciation is recaptured, would it not?

[TaxGuyBill]

You only have $5,000 of Unrecaputured Section 1250 Gain.

The rest of the depreciation is rolled over into the new property.

[Roland Slugg]

Snagg, will you please stop referring to "depreciation recapture." As this writer has said on this forum many times, and a few others have as well, with rare exceptions there is no depreciation "recapture" when real estate is sold or exchanged. (There is depreciation recapture when personal (i.e. §1245) business property is sold or exchanged at a gain, but in your post the PIQ is real property.)

Using your figures, it appears the taxpayer's property was worth $195k, so in the exchange he received real property worth $190k plus $5k cash ... i.e. "boot." When you complete Part III of F-8824, you should end up with a $5k gain on line 23 and a basis in the like-kind property received of $9k on line 25. Your amounts will be a little different because yours are obviously rounded, and there will be the exchange/escrow costs to include.

Remember, no amounts actually get transferred from F-8824 to other forms in a tax return. So after you have a nice, tight F-8824, you still report the exchange on F-4797. There will be NO depreciation recapture when you complete F-4797. However, when the gain is transferred to Schedule D (F-1040), the $5k gain will be classified as "Unrecaptured §1250 Gain" and, depending on the T/P's other capital gains and losses, it might be taxed like ordinary income but at a tax rate no higher than 25%.

[Snaggletooth]

Thanks Roland

...for zeroing in on the real question and supplying the real answer which is "no, depreciation recapture is not necessary." Whether the language is proper or not, that was the real question from the original post.

I've harped on this before so if people are tired of reading they don't have to.

I continue to be amazed at the responses which supply no answer or incorrect answers to subject. As far as I know there is no requirement on anyone to respond at all. The worst responses are actually insults, such as "have you read the instructions?" or "see Publication 535" or "try to consult with other professionals In your area." The implication is that the original question was posed by someone too lazy to read available material. Worse still, this kind of response doesn't answer the question either.

For example, this question about depreciation recovery (or whatever you call it) is typical. I am admittedly probably too lazy to read IRS section 1031 in its entirety, and it might not address prior depreciation in its entire section. I am not ashamed to ask the question from others who know rather than spend 6-8 hours in interpreting stilted language in the code. However, to my credit, I have indeed read the instructions for Form 8824 (like-kind exchanges) but other than referring to Form 4797 they do not address whether prior depreciation needs to be recognized.

With nagging narratives like the above I have often been accused of trying to legislate how people answer posts. There is no such intent, but if that's the way it is taken, then so be it. I honestly very much want this to be a great place to ask questions and get help without it becoming a cesspool to wade perhaps dozens of worthless responses which do not relevantly address the subject at hand. I'm not engaging in a war with anyone and wish no one any ill will - I just appreciate this TMI board and believe it can be even better by observing these suggestions.

Thanks for answering, Sluggo, and having the depth of knowledge to understand the issue.

[TaxGuyBill]

Snagg, will you please stop referring to "depreciation recapture." As this writer has said on this forum many times, and a few others have as well, with rare exceptions there is no depreciation "recapture" when real estate is sold or exchanged. (There is depreciation recapture when personal (i.e. §1245) business property is sold or exchanged at a gain, but in your post the PIQ is real property.)

Although you are technically correct, it is absolutely crazy that there are different terms for 1250 property versus 1245 property, when they are essentially the same thing.

As a side note, Publication 523 now uses "recapture" rather than Unrecaptured Section 1250 Gain.

[Burke]

Snagg, while I agree with your comments about replies that in essence say, "go read the Pubs...etc." I didn't see any of those in this thread (unless they got deleted.)

[Snaggletooth]

No insults

Burke this thread had none of the insulting responses, but it still required seven replies before anyone answered the question.

I realize one of the replies was your own, and usually your responses are very information, reliable, and accurate. You are clearly not one of the comrades I had in mind when I made my rant. Please just take this in stride or ignore.

If I don't stop ranting about this, it may come to the point where no one answers my posts. I certainly don't want THAT to happen.

[Burke]

Yes, and if I had taken the time to re-read your OP in a more thorough manner, I would have answered my own question......

[Burke]

Yes, and if I had taken the time to re-read your OP in a more thorough manner, I would have figured out the answer to my own question......

[Rapid Robert]

it still required seven replies before anyone answered the question.

Did you try reading the IRS pubs? <grin>