I have a client who did a like-kind exchange by selling one rental property and purchasing another rental property. I am having difficulty determining how to calculate the basis of the received property. I am reading where the remaining basi of the given-up property becomes the basis of the new property. I am also reading where the basis of the old property, plus the cost of the new property less the deferred gain becomes the basis of the new received property. Any help is appreciated. Thank you.
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General rule is basis of new property is purchase price less any deferred gain. However, many things can effect that such as boot, loans, etc. Print out a blank 8824, grab a pencil and calculator and work through the 8824 instructions line by line. -
I don't like 1031 exchanges and wish the law was repealed, as it appears to be just a tax break for wealthy taxpayers. However, to answer your question, I believe there the default way to do it, and an option to elect out.
From some CE material I have:
So by default you now have two "assets" to depreciate. Per 1.168(i)-6 there is an election you can make to avoid this complexity, by treating the new property as if it was a newly acquired asset. You can then depreciate the entire basis (exchange basis plus excess basis combined) using recovery period, method, and convention for the year placed in service."the depreciable basis of replacement property acquired in a like-kind exchange is split between:
• The exchanged basis (adjusted basis of the property given up)
• The excess basis (from unlike property or boot paid for the property)
The exchanged basis of replacement property is depreciated over the remaining recovery period using the same depreciation method and convention as the property given up. The excess basis is depreciated using a new recovery period and the applicable depreciation method and convention."
Under the election, you are essentially starting the depreciation clock over again for part of the basis, but since depreciation in the long run is just a timing difference, it doesn't make a huge difference tax-wise IMO."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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Do I also add the remaining basis of the property given up to the basis of the new property?Comment
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I don't know how to say it any more clearly than what was already pasted.
"the depreciable basis of replacement property acquired in a like-kind exchange is split between:
• The exchanged basis (adjusted basis of the property given up)
• The excess basis (from unlike property or boot paid for the property)"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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