1031 exchange

[AccTaxMan]

A question about 1031 exchange. For example:

Old property FMV (sell price): $100,000
Old property loan paid off by the sale proceeds: $40,000
New Property FMV (purchase price): $150,000
New Property loan assumed: $0.00
Taxpayer put in $90,000 to the escrow to close the transaction
Assume no buy and sale costs to make it simple
Assume the deal fulfills all the other requirements of a 1031 exchange.

Since what the taxpayer put in ($90,000) to close the transaction is more than the loan liability relieved ($40,000), is it pretty safe to say that there will be no gain to be recognized in this exchange?

[jainen]

it will be deferred

>>the loan liability relieved ($40,000)<<

Where do you get the idea that paying the full amount due is some kind of "liability relief"? Borrowing money or paying it back has nothing to do with whether there is gain or loss, because it has no effect on contract price, transaction costs, or basis.

Since you haven't mentioned BASIS it is not possible to know whether this transaction will realize gain or loss, but in either case it will be deferred.

[S T]

1031 xchange

like kind property given up
would need to know

original basis plus improvements, depreciation allowed or allowable, etc.

what you have provided is some of the info for equity balancing calculation

fmv/sales price 100,000
liabilities/mortgage 40,000

like kind property received

fmv/sales price 150,000
liabilities/mortgage

then boot received or given

cash received to balance equities
or cash paid to balance equities
liabilities/mortgages given up
or liablities/mortgages received
fmv of unlike property/services given up

from 1031 exchange worksheet,

so not all info is present, but if all 1031 rules are met, could be a deferral

S

[AccTaxMan]

>>the loan liability relieved ($40,000)<<

Where do you get the idea that paying the full amount due is some kind of "liability relief"? Borrowing money or paying it back has nothing to do with whether there is gain or loss, because it has no effect on contract price, transaction costs, or basis.

Since you haven't mentioned BASIS it is not possible to know whether this transaction
will realize gain or loss, but in either case it will be deferred.

Thank you for your reply.

I got the idea from the Form 8824 instruction:

"(1) The instructions to line 15 of Form 8824 state that the sum of the following is included on line 15:

(i) any cash paid to the taxpayer by the other party;

(ii) the fair market value of any other (non-like-kind) property received by the taxpayer; and

(iii) any net liabilities assumed by the other party - the excess, if any, of liabilities assumed by the other party on the old property over the total of: (a) any liabilities assumed by the taxpayer on the new property, (b) cash paid by the taxpayer to the other party, and (c) the FMV of any other (not like-kind) property given up by the taxpayer."

I have been told before that in a 3-way exchange (you sold the old property to one party and then bought the new property from another party), liability relieved (old property loan paid off) in the process is considered "liabilities assumed by the other party". I could have misunderstood it though.

As for the adjusted basis of the old property, let's say it's $10,000. And there is no accumulated depreciation because it was an investment property.

And my question here is only about whether there is any gain to be recognized when the taxpayer has to pay out an additional $90,000 to close the transaction. His only 'benefit' in the exchange is the $40,000 loan of the old property having been paid off and therefore relieved.

[Bill Tubbs]

New basis $60k

old basis was $10

taxpayer paid $90k -- $40k of which went to pay off the old note (does not affect the calculations) -- the other $50k was because of the FMV difference of the 2 properties.

So, new basis is:
old basis of $10 + new cash infused of $50k

Loans are irrevelant UNLESS they are assumed. I don't see many loans assumed by the purchasers nowadays.

Bill

[outwest]

A useful worksheet FWIW..

here is a link to a 1031 exchange site that has a downloadable excel sheet to run the numbers.

bayview1031.com/8824

the link to the worksheet is the middle left of the page. You just fill in the numbers and it takes them to the 8824 lines.

Not an endorsement, but this was a insert in the Journal of accountancy. FWIW

[jainen]

The Great Fallacy

>>You just fill in the numbers and it takes them to the 8824 lines<<

This is The Great Fallacy of computers. It is possible to write in any old number and still get a real spiffy printout. The true professional will complete the 8824 by hand, so as to be personally responsible for every nuance of the math.

This thing about loans in an exchange baffles me--why smart people who would never say you must pay capital gains tax on a refinance insist that the same mortgage creates gain under Section 1031.

Suppose I want to buy your property worth $100,000, but it has a $40,000 loan on it. Will I pay the full $100,000 if I have to assume that loan, the same as if you pay it off yourself?

[outwest]

Like I said : FWIW..

for what it's worth...

Just another tool to check and use with your paper and pencil. Though I might note I'm not sure I could find a columnar pad in my office, though I run the numbers a lot on my spreadsheet software.

As far as your example: of course you would only pay 60k cash + 40K debt assumption. (I know, loan assumptions almost never happen, but it's your example) Seller recognizes $60k cash and $40k debt relief = $100k proceeds, $60k cash in pocket.

OR

$100k cash proceeds less 40K debt paid = $60k cash in pocket.

So fine, ignore the debt, whatever. Both methods done correctly, it's all the same 98% of the time.

[AccTaxMan]

here is a link to a 1031 exchange site that has a downloadable excel sheet to run the numbers.

bayview1031.com/8824

the link to the worksheet is the middle left of the page. You just fill in the numbers and it takes them to the 8824 lines.

Not an endorsement, but this was a insert in the Journal of accountancy. FWIW

I downloaded the worksheet. But I couldn't open it because it said the worksheet is password protected. Is it because I tried to open it with another spreadsheet program? I don't have excel or I do not even know whether I have excel in my PC or not (I am a computer idiot).

[outwest]

Just checked my copy..

and it opened right up. Not sure what might be different about yours.

[AccTaxMan]

and it opened right up. Not sure what might be different about yours.

I will try to download it again. Thanks.

[AccTaxMan]

A related question.

One of the requirement of a 1031 exchange is that the taxpayer has to identify the new property within 45 days after the old property is sold.

What about if the taxpayer has already identified the new property before the old property is sold? Does he still have to identify the new property within 45 days? What about if he has already identified the new property 50 days before the old property is sold? I hope they won't say the taxpayer has identified the new property 5 days too early. (LOL...I know I am thinking too much about it)

[jainen]

What do you think of that?

>>I know I am thinking too much about it<<

I wouldn't say so. 1031 depends on the paperwork being very exact, and it speaks well of you that you aren't making any assumptions. Suppose the exchangor not only identifies but actually ACQUIRES the replacement property before transferring the old property. What do you think of that?

[outwest]

The 45 day clock..

generally applies after the sale. At the closing of the relinquished property, you would notify the accomodator of the replacement property and would start the 180 day clock to close on it.

The fact you had your eye on the replacement before selling the relinquished property means nothing.

[wexeter]

45 Calendar Day Identification Period

The 45 calendar day identification period only starts with the conveyance or transfer of title of the relinquished property. It does not matter if you were to identify prior to the close at all. There would be no effect. And, should your client actualy acquire and close on his or her acquisition of like-kind replacement property during the 45 calendar day period that would suffice as identification.

The majority of good Qualified Intermediaries will provide the client with an ID form that can be completed and faxed over to the QI.