section 1031 & then the sale

[Kram BergGold]

My client did a 1031 and is now thinking of selling that property, thus realizing the gain.
At the time of the 1031 exchange $59,000 of depreciation had been taken. When he sells this property I assume this $59,000 plus the depreciation claimed since the 1031 exchange of $25,000 will become $84,000 of unrecaptured 1250 gain, correct?

[DaveO]

I would sure think so

But I had this very situation a few years ago. I finally wrote it up along with a worksheet and sent it to an IRS appeals officer I knew pretty well. His reply was thet only the depreciation claimed since the exchange was subject to recapture. I don't have a cite for you. I hope someone else does because I'd like one myself.

[Bird Legs]

1031 Exchange & sale-depreciation

You might look at Pub 544 - Sales & other dispositions of assets.
Have not checked out this Pub but it might help.
Good Luck

[Roland Slugg]

Recaptured versus UN-Recaptured

Dear Dave O

First, I hope you're not using the terms "recapture" and "unrecaptured" interchangeably, as they are very different ... sort of opposites in fact. For real estate, "recapture" is only the excess, if any, of accelerated depreciation over straight-line. Since SL has been mandatory since 1987, it applies only to real estate placed in service pre-1987. "Unrecaptured" refers to all other depreciation, and it's not really "recaptured," per se, but is only subject to a potential tax rate of 25%. In many cases, however, that special 25% rate never comes into play, or only applies to part of the amount to which it could apply.

If the IRS appeals officer you referred to was correct, there must have been enough recognized gain in the earlier exchange year to trigger recapture in the exchange year. There are several other situations that can also trigger year-of-sale recapture. Of course, it is always possible that the appeals officer was simply incorrect in his understanding of either the facts or the law.

Regarding Kram BergGold's question, the entire $84k is "unrecaptured §1250 gain," less the amount of "recapture," if any, taxed in the exchange year and the current/sale year.

[Kram BergGold]

Thanks Roland

After the first two responses I decided to check out some texts from NCPE. In the 2004 book I confirmed that the 1250 unrecaptured gain gets taxed as you said.

[jainen]

non-depreciable land

>>the 1250 unrecaptured gain gets taxed as you said<<

I agree, and it is true even if the replacement property has a different proportion of non-depreciable land. Obviously the records might be complicated, especially if someone in the past didn't really do it right. Perhaps that was the auditor's concern in Dave's case, that tracking the exact allocation might be more trouble than it was worth to him.