Wexeter

[Gene V]

This was posted on another message board by Ray T--what would you say the recognized gain is?

Also, could you explain the difference between mortgage being assumed by the other party and
mortgage being paid off with the exchange money. Explain how all this effects the exchange.

Situation:

Property being released:

Basis $115,000

Liability $104,000

Sale Price $200,000

Property being obtained:

Purchase Price $180,000

Terms: $36,000 Down $144,000 Mortgage

How is gain calculated? After the down payment, there will be cash retained; however, a larger liability will be assumed. Any comments would be appreciated.

[Corduroy Frog]

$85,000

I think I missed something. If there is a selling price of $200,000 and a basis of $115,000, the gain is $85,000. The terms have obscured the simplicity of the calculation.

Gene, did you intend to ask this in a different manner? For example, should you leave off the selling price and allow us to calculate gain as if this were a like-kind exchange? If so, the basis of party B might only be relevant as a carrying basis for party A.

[Gene V]

This is the way it was on the other board, this was a 1031 exchange- their was a considerable amount of discussion on the other board on what the recognize gain was, some said it was $60,000 and others said it was $20,000. Like to get wexeter opinion on this.

[LTS]

other board revisited

This is the way it was on the other board, this was a 1031 exchange- their was a considerable amount of discussion on the other board on what the recognize gain was, some said it was $60,000 and others said it was $20,000. Like to get wexeter opinion on this.

i had an opinion on this awhile back (85k realized and recognized), but after a better look, that was wrong. the original didn't say if there were exchange expenses. there likely were exchange expenses, and lines 15/18 would be affected. for simplicity, i assume no exchange expenses.

60k taken out of the deal - 20k on exchange gain & 40k on increased mortgage.
85k realized gain & 20k recognized gain.
65k deferred gain & 115k new basis.

fm 8824
15) 20k
16) 180
17) 200
18) 115
19) 85
20) 20
21) 0 - assumed
22) 20
23) 20
24) 65
25) 115

[jainen]

Line 15 as only 20K

LTS, please explain Line 15 as only 20K, since he ended up with 60K in his pocket. (Line 15 is "Cash received, FMV of other property received, plus net liabilities assumed by other party")

[LTS]

ln 15

jainen, the ln 15 form says "cash received".

the ln 15 instruction defines the first case as "any cash paid to you by the other party" (i think the "other party" does not include net amounts received or paid in the settlement or initiation of mortgage obligations). this is where i felt like i agreed with your position (if i am assuming correctly) that mortgages don't matter in the fm 8824 calculation. mortgages are useful in an analysis of cash flow.

[jainen]

The other party

>>"any cash paid to you by the other party"<<

The other party paid $200,000 cash, not 20, 60, or 96.

I appreciate you making the distinction between cash flow (another term for balancing the exchange) and paying off a mortgage.

[Gene V]

I look at it this way-every thing goes into escrow. (You put in you property with a value of $200,000) and after all is said and done. You receive out of escrow a new piece of property with a value of $180,000 plus $60,000 in cash. So I would say line 15 is $60,000. You realized gain was $85,000 ($200,000 - $115,000=$85,000) and deferred gain is $25,000 (your realized gain of $85,000 minus your recognized gain of $60,000 that was the cash you received = $25,000 deferred gain)

[LTS]

1031 xchange

jainen - the other party becomes the intermediary in a 1031. that leaves the question of 20k or 60k cash received. i still hold (not real firmly i admit) the the 40k net mortgage received is not cash received from the other party.

gene - one slight adj to your calculation using 60k cash received. 60+180=240-115=125 realized gain. then eventually 60k recognized, 65k deferred gain, and 115k new basis.
my problem is that the realized gain is pretty clearly 200k selling price - 115k adj basis = 85k. how do you get there? by not considering the 40k as cash received.

[New York Enrolled Agent]

I posted this on the other board. Gene V. - I still think 60K is recognized so we are in agreement..

Property Given up

$200K = FMV "sale" price

$104K = existing mortgage satisfied

Thus $96K = cash received


Property acquired

$180K = FMV "purchase" price

$144K = new mortgage

Thus $36K = cash invested


Cash Boot: Cash received is greater than cash invested, thus cash boot = $60K


There is no mortgage boot - its a simple test in this example - the new mortgage exceeds the satisfied mortgage.


Total boot = $60K + $0 = $60K = recognized gain


I think the problem with Form 8824 is on line 15 when it says cash received we tend to think ONLY about money that exchanges between the parties.

[LTS]

Nyea

for this to work on the 8824, ln 18 needs to be 115k+40k=155k. this is what was asserted by some on the other board from the worksheet for the referenced tax program. the ln 18 instruction does say the sum of: adj basis prop given up (115k) + net amount paid to the other party (the intermediary) ; the EXCESS of (b) cash you paid to the other party (144k?) OVER any liabilities assumed by the other party (104k?) = 40k. see Reg 1.1031(d)-2 for amounts to enter on ln 15 & 18.

this Reg could be explanatory, but i don't know how to look it up - so maybe i should just shoot myself now and end my misery. is cash (new mort) paid into the ESCROW of the intermediary considered as paid to the other party (intermediary)? also, is the old mort liability that is paid off through the ESCROW considered as assumed by the other party (intermediary)? if so on both accounts, then i defer your story.

i would like to convert this story into a "what if" it was a trade-in of an asset, like a truck, to a dealership (the other party) for a new asset - with financing handled outside the dealership. i will wait. maybe this is where jainen's reference to a "step up?" transaction comes into play. i must admit i am not familiar with it.

[les grans]

Does this Reg Sec 1.1031(d)-2 work for you?

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=c24c70f4522d30dac5f7511ebe03793d&rgn=div8&view=text&node=26:11.0.1.1.1.0.4.45&idno=26

Don't shoot!!

[LTS]

1.1031(d)-2

http://ecfr.gpoaccess.gov/cgi/t/text...0.4.45&idno=26

Don't shoot!!

thanks for your attention to me for your 1st post. luckily i am a bad shot even from close range. i have saved the address for future fooling around to learn how to look up regs.

those examples are instructive for transfers where the parties end with one or each other's mortgage. i am still left with the intermediary question of net cash back to the first party to the exchange after the old mortgage is paid off and new mortgage is written.

[Gene V]

LTS--If you want to read about 1031 exchange--read Topic 10 and Topic 3--they cover figuring boot and taxable gain and figuring basis of replacement property.

http://www.irs1031exchanges.com/Topic_10_-_Figuring_Substituted_Basis_of_Replacement_Property.shtml

http://www.irs1031exchanges.com/Topic_3_-_Figuring_Boot_and_Taxable_Gain.shtml

[LTS]

Gene V - thanks for link. i have copied topics 10&3 and a bunch of other stuff. it looks like the answer is in there somewhere.