Form 8824 Required?

[Chantecler]

For a simple partition of real estate property held as tenants in common between four siblings, equal value for equal value and no boot involved, is it necessary to file Form 8824 - Like Kind Exchanges? Quit Claim deeds were filed to effect the partition.
Who assumes responsibility for the Section 1250 depreciation recovery taken on one of the parcels? Does that carry over partially to the owner who now owns bare land, or does it all remain with the owners who own the land improvements?

[Burke]

Doesn't sound like it actually qualifies as a like-kind exchange unless it was set up in the beginning to be treated as such. Bare land can be exchanged for rental property under 1031 rules and vice-versa. However, all properties must continue as investment property and not converted to personal use. Was it actually handled through a qualified intermediary? How were these "equal values" determined?

Perhaps the doctrine of Excess Basis may apply: to wit, the owners who have ownership of the improved property now have depreciable basis in excess of the basis they formerly owned. Under IRS rules for 1031's or involuntary conversions, that excess basis is treated as separate depreciation in the year of exchange and depreciated under the same rules, time periods and depreciation methods as applied to the previous property. Any expenses involved in this "partition" would be added to everyone's basis. It would also be subject to related party rules, IMO, in that each of the siblings must hold onto the exchanged properties for at least two years. Interesting scenario. Would like to see further comments.

[taxea]

what was exchanged?

[Roland Slugg]

I'm inferring from the last part of your OP that the four owners used to own undivided interests in a single piece of improved real estate, and they cross deeded everything so now each of the four owns 100% of a specific portion of the previous property, and that one of the four owners now owns bare land only.

IMO this was a LKE ... specifically a simultaneous LKE, requiring no QI. Each owner should report the exchange on a F-8824 attached to his tax return. In addition, they will all have to file a F-8824 in each of the two tax years following the year of the exchange.

Allocating the basis of the land and the building(s) between everyone, as well as allocating the accumulated depreciation among those who continue to own the improvements is going to be tricky. Before posting this reply I thought about that quite a bit, and was unable to come up with a single best approach. It is possible that even though there was no money exchanged, there may still be Unrecaptured §1250 gain recognized by the owner who got only land. Not sure of this, though, and the two Bloody Mary's I've enjoyed aren't helping my thought clarity ... at all. Good luck with that.

[Chantecler]

Form 8824 Required?

Doesn't sound like it actually qualifies as a like-kind exchange unless it was set up in the beginning to be treated as such. Bare land can be exchanged for rental property under 1031 rules and vice-versa. However, all properties must continue as investment property and not converted to personal use. Was it actually handled through a qualified intermediary? How were these "equal values" determined?

Perhaps the doctrine of Excess Basis may apply: to wit, the owners who have ownership of the improved property now have depreciable basis in excess of the basis they formerly owned. Under IRS rules for 1031's or involuntary conversions, that excess basis is treated as separate depreciation in the year of exchange and depreciated under the same rules, time periods and depreciation methods as applied to the previous property. Any expenses involved in this "partition" would be added to everyone's basis. It would also be subject to related party rules, IMO, in that each of the siblings must hold onto the exchanged properties for at least two years. Interesting scenario. Would like to see further comments.

This was a simultaneous division of rental property between four siblings who had inherited the property in unequal shares from their deceased mother. After the deeds were exchanged, one sibling owned bare farm land, the others the farmhouse and outbuildings along with the remaining 25 acres of land. The three siblings subsequently sold their property, while the fourth sibling continues to own bare land and has no intention of selling it since it connects with other land he had previously owned. This was not a deferred exchange, and there was no qualified intermediary. Equal values proportionate to ownership interests were established via professional appraisal about two years prior at the time of the mother's death, which also established a stepped up basis in the property. Prior to the partitioning of the property, the farmhouse had been rented out, thus the question about depreciation recapture.

[Chantecler]

Form 8824 Required?

Thanks for your response. See my reply to Burke for more details. It was a simultaneous partitioning/exchange of property with no Q.I. as you surmised. The three siblings who received the improved real estate, a rented farmhouse, sold the property they then owned in the same year, 2016. The value of the properties were determined via professional appraisal two years prior, just after the mother died, and that appraisal was used to establish a stepped up basis in the entire property. I was not sure if this was considered an actual exchange, since all four siblings had owned an interest, albeit unequal interests, in the entire property prior to the partitioning. So you still think 8824 is required for 2016?

[Burke]

I am assuming this partitioning and subsequent sale all took place in 2016. So the other three assumed the fourth owner's interest in the depreciable property when the quitclaim deeds were done. The entire property would have received a stepped-up basis when the mother died, which you said happened a couple of years ago. And depreciation would have started over. So apparently each of the four siblings claimed income, expenses and depreciation for the last 2 years? Remember, that to defer the gain, if any, the related parties have to retain the property for two years after the exchange. This did not happen so there may be some gain for each of the 4 owners, including the one who just got land, due to depreciation taken since the mother died. And while an 8824 is normally done in an exchange, it is done primarily to establish each party's reportable gain that is being deferred and for subsequent depreciation documentation to the new owner(s). Since the gain does not qualify for deferment and the property has already been sold, I can't see what that accomplishes. Just calculate the gain and report on each of the 4 returns.

[Chantecler]

Form 8824 Required?

I am assuming this partitioning and subsequent sale all took place in 2016. So the other three assumed the fourth owner's interest in the depreciable property when the quitclaim deeds were done. The entire property would have received a stepped-up basis when the mother died, which you said happened a couple of years ago. And depreciation would have started over. So apparently each of the four siblings claimed income, expenses and depreciation for the last 2 years? Remember, that to defer the gain, if any, the related parties have to retain the property for two years after the exchange. This did not happen so there may be some gain for each of the 4 owners, including the one who just got land, due to depreciation taken since the mother died. And while an 8824 is normally done in an exchange, it is done primarily to establish each party's reportable gain that is being deferred and for subsequent depreciation documentation to the new owner(s). Since the gain does not qualify for deferment and the property has already been sold, I can't see what that accomplishes. Just calculate the gain and report on each of the 4 returns.

There is an exception to the general rule of reporting gain by the non-selling party if the purpose of the exchange was not tax avoidance. It requires an explanation to be filed with the tax return. (See Part II line 11(c) I can't see in this case that tax avoidance was the purpose of the partitioning/exchange or the sale. Actually, the property was sold at a loss due to the step-up in basis at death, so there is no gain to report anyway. I guess it would be a good idea to file the form anyway to establish basis of the property retained?

[Roland Slugg]

I guess it would be a good idea to file the form anyway to establish basis of the property retained?

Yes, I think so, in addition to the fact that IMO this was, indeed, a LKE. Since the property was sold in the same year as the exchange, the F-8824 will only have to be included one time.

I think the most interesting questions are these:

(1) "Does the sale by the three owners of the building trigger any recognized gain for the owner who took only land in the exchange and did not participate in the subsequent sale?"

(2) "When the owner of the land eventually sells it, will part of his gain be Unrecaptured §1250 Gain, equal to his share of the pre-exchange depreciation?"

Re: (1) I don't think it does, because he didn't sell anything.

Re: (2) I'm not sure. If you use the "split basis" approach, that owner could be considered to own two assets, and one of those assets would be his undivided interest in the former residence, and it has Unrecaptured §1250 Gain potential. On the other hand, the potential for Unrecaptured §1250 Gain may attach only to the building, and that went to the other three owners. I lean toward the latter. It was revealed in an add-on post that the three who sold had a loss on their sale. However, when the owner of the land eventually sells, he may have a gain.

It's a very interesting scenario.

[Chantecler]

Form 8824 Required?

Thanks to all who responded. It is an usual situation indeed, but I will file Form 8824 as advised.

[Burke]

I wanted to respond to Roland's post of 2/11 but cannot seem to get the Quote feature to work. Anyway, I tend to agree with both (1) and (2) scenarios. When the land owner obtained his allocation of the property in 2016, he had depreciation deductions for the prior two years which were taken on his tax return. Those reduced his basis from the time when he inherited the property, as it did all the other owners. Was the "equal" exchange calculated just using FMV or adjusted for each owner's basis in the property? The property was sold within the 2-year holding requirement to defer LKE gain. (In fact in the same year).

Therefore, he has both an LKE requirement to file 8824, and a requirement to report any resulting gain. OP says property was sold at a loss, so I am assuming that has been fully calculated with all the reduction in basis since 2014, etc. So the question now becomes, does he get his share of any loss which would be deductible since it was business property? As Roland said, it is a very interesting scenario.