1031 EXCHANGE

[Max W]

Client exchanged a $350K property for a $200K property (bad move right there).

Basis of sold property $160; depreciation $40k = Adj Basis $120K

Mort paid off $100K; cash out $200K. = $300K boot.

Paid cash for exch property $200K.  Net boot $100K. (300-200).

Besides the $100k boot, isn't there a Cap Gain on the transaction?

Don't seem to get the proper results using the 8824 worksheet.

Any ideas?

TIA

 

 

Edited October 9, 2015 by Max W

[DANRVAN]

I am not clear on your numbers.  Are you saying the closing price of the property given up was $350,000?  If $100,000 was used to pay off the mortgage and $200,000 was left in the exchange to purchase the  replacement property, what happened to the other $50,000 after selling expenses?

[jklcpa]

I agree with Dan that the numbers don't make sense about the $50K difference.

Part of the problem that I see, if I'm interpreting your post correctly, is that the mortgage debt of $100K on the relinquished property was paid off with exchange funds so that is creating the addtional boot, and also is the reason that the client was able to only reinvest $200K in the acquired property.  

The realized gain on the property given up is $180K, but the form should work out that the recognized gain is limited to the $100K of boot not reinvested in the new property.  It is as if the client received that $100K in his hands and then took it to pay off the bank even though it was paid on his behalf directly at settlement, and any time the seller touches the money, there will be gain recognized.

Ultimately, to answer your question, the entire $100K would be capital gain if this was income-producing or investment property, if there was no ordinary income recapture component carved out due to depreciation.

[Max W]

Client exchanged a $350K property for a $200K property (bad move right there).

Basis of sold property $160; depreciation $40k = Adj Basis $120K

Mort paid off $100K; cash out $200K. = $300K boot.

Paid cash for exch property $200K.  Net boot $100K. (300-200).

Besides the $100k boot, isn't there a Cap Gain on the transaction?

Don't seem to get the proper results using the 8824 worksheet.

Any ideas?

TIA

 

 

I rounded the numbers the wrong way. It should be $125K mort & $225K cash out. =, $350K minus $200K new prop. = $150K.

That works out on paper, but cant get it to work on the worksheet. 

Also, does the $40K depreciation get recaptured?

 

 

[jklcpa]

re: recapture - maybe all or only part. See the instructions for line 21 of the 8824.

I don't know what worksheet you are trying to make work, so let's try using the 8824 step by step:

line 15 will be 150. That is cash of 125 used for mortgage + 25 not reinvested into any new property. Not reivested is the 225 cash received by the intermediary - 200 used to acquire the new property.

line 16 - 200, the FMV of new property

line 17 - 350, a subtotal

line 18 - 120, the adjusted basis of prop given up

line 19 - 230, the realized gain   (SP of 350 - adjusted basis 120)

from there, you'll have to work through the recapture for line 21 to determine the ordinary income portion. I can't do that since you didn't give the details.  Your total gain recognized shouldn't exceed the 150.

I hope that helps.

[Max W]

Thank you , Judy.

Everything worked out ok.  It is the ATX 8824 work sheet that gave me fits.

Now I see that I was overthinking it and making it more complicated than it is.

[jklcpa]

Yay! Glad you worked it out.   Overthinking...we all do that!