Need some help!

[Tax Prep by Deb]

Hopefully someone can lead me in the right direction.

I have a client who owned an apartment complex and sold it and purchased a lot that a major chain restaurant is sitting on.

They selected the property within the time frame needed, and completed the transaction on time as well.

So far so good? The new property cost more than the old, so from where I sit it looks like a real like kind exchange. Yes they did use an approved intermediary to complete both transactions.

Here is my question: Is there anything (a form or something, I should be looking for) that shows this was a like kind exchange, or is it something I do through the appropriate forms, that tells IRS that it was a like kind exchange?

Is all I need the closing papers for both transactions, as well as the history, such as cost basis, depreciation taken, ect.. from the property that was sold?

Any help would be greatly appreciated!

Deb!

[mcb39]

Hopefully someone can lead me in the right direction.

I have a client who owned an apartment complex and sold it and purchased a lot that a major chain restaurant is sitting on.

They selected the property within the time frame needed, and completed the transaction on time as well.

So far so good? The new property cost more than the old, so from where I sit it looks like a real like kind exchange. Yes they did use an approved intermediary to complete both transactions.

Here is my question: Is there anything (a form or something, I should be looking for) that shows this was a like kind exchange, or is it something I do through the appropriate forms, that tells IRS that it was a like kind exchange?

Is all I need the closing papers for both transactions, as well as the history, such as cost basis, depreciation taken, ect.. from the property that was sold?

Any help would be greatly appreciated!

Deb!

Deb...go into Asset Entry sheet for the property that he sold. On the bottom of the page, click on "Dispositions". This will bring up a drop down box for type of disposition. Click on like kind exchange and the wonderful worksheet pops up and you fill in the blanks. Good Luck

[Tax Prep by Deb]

Deb...go into Asset Entry sheet for the property that he sold. On the bottom of the page, click on "Dispositions". This will bring up a drop down box for type of disposition. Click on like kind exchange and the wonderful worksheet pops up and you fill in the blanks. Good Luck

Thanks,

Do I need anything other than the closing papers for both transactions as well as basis and depreciation taken? Do I need something indicating it was a like kind exchange or am I to determine that based on the facts present?

Deb!

[mcb39]

Thanks,

Do I need anything other than the closing papers for both transactions as well as basis and depreciation taken? Do I need something indicating it was a like kind exchange or am I to determine that based on the facts present?

Deb!

You are determining it on the facts present. Obviously, you would not calculate a like kind exchange if you were not in possession of all of the facts and data. At least, I have never been questioned on it.

[Tax Prep by Deb]

Thanks, that what I thought but it always helps to have other's opinions. It really does look like it qualifies, so I will start working on it tomarrow and hope everything goes smoothly!

It's my last major return to complete before Tuesday, I still have several extensions to file, then it's time to rest!

Thanks again,

Deb!

[joelgilb]

it is form 8824. You should be able to do most of the work from the asset entry, but can also enter it direct on the form.

Joel

[jainen]

>>Do I need something indicating it was a like kind exchange<<

Generally you do not need to verify your client's documentation unless you run into an inconsistency. However, 1031 is a very demanding section, and it would be best to review the intermediary's contract and other sales and exchange documents as well as the basic settlement statements. As a minimum, you should ask for a copy of the written statement in which he identified replacement property within 45 days. Dealing with large properties and national corporations is bound to present some timing problems.

You also want to be sure the property is truly like-kind. The apartment complex undoubtedly had personal property with it, such as washing machines, office furniture, and maintenance equipment. The replacement property has a land lease and possibly other tangible or intangible assets. The ONLY way to clearly understand these issues is by reading the sales contracts, escrow instructions, and the rest of the whole file.

If they are just bringing this to you now, put it on extension. Unless this was a previous client of yours, there's a reason he isn't going back to his own accountant. In any case, this is beyond your ability to resolve before April 15th.

[Tax Prep by Deb]

>>Do I need something indicating it was a like kind exchange<<

Generally you do not need to verify your client's documentation unless you run into an inconsistency. However, 1031 is a very demanding section, and it would be best to review the intermediary's contract and other sales and exchange documents as well as the basic settlement statements. As a minimum, you should ask for a copy of the written statement in which he identified replacement property within 45 days. Dealing with large properties and national corporations is bound to present some timing problems.

You also want to be sure the property is truly like-kind. The apartment complex undoubtedly had personal property with it, such as washing machines, office furniture, and maintenance equipment. The replacement property has a land lease and possibly other tangible or intangible assets. The ONLY way to clearly understand these issues is by reading the sales contracts, escrow instructions, and the rest of the whole file.

If they are just bringing this to you now, put it on extension. Unless this was a previous client of yours, there's a reason he isn't going back to his own accountant. In any case, this is beyond your ability to resolve before April 15th.

Thanks jainen,

I have reviewed most of the documents, the only one I really don't have but will request tomorrow is the 45 day letter identifying the property.

Escrow on the apartment closed on June 23, 2007 and the lot, (Ruby Tuesday sits on) was closed on September 13, 2007. So I have a good feeling that all the time tests have been met, but I will request the additional documents.

As far as other personal property, the only thing I am aware of is some old washing machines that have already been completely depreciated. To my understanding and what I see in the documents the only thing they get from the land purchase is just the land. The actual building belongs to a corporation. At least that it the way it appears. They did assume the lease on the Ruby Tuesday ground, but other than that I don't think they got anything else.

But I do have another question. The apartment building was purchased in 1967 and is thus completely depreciated. The apartment was originally purchased for $68,000.00 and there doesn't seem to have been any major improvements other than maintenance type repairs. From the records I have which I have been doing their taxes for several years now is a roof that likewise is depreciated out. This is one of the reasons they sold, they are an older couple and the apartment building is needing some major repairs and they just don't have the energy to complete them.

My question is due to recapture of depreciation they are going to have $68,000.00 that will have to be reported as ordinary gain, correct? Then remainder of the gain gets deferred into this new propertry correct?

I do feel I'm in over my head, and would like to file an extension however I need to tell the how much money to come up with. So if you can give me any help at all I would sure appreciate it. THIS IS NOT MY EXPERTISE!!!!

Deb!

[jainen]

>>They did assume the lease on the Ruby Tuesday ground<<

Don't you think the right to receive monthly income for a long, long time is worth something?

>>due to recapture of depreciation they are going to have $68,000.00 that will have to be reported as ordinary gain<<

I doubt there would be anything to recapture after that much time, but at any rate 1031 defers it ALL.

[les grans]

"My question is due to recapture of depreciation they are going to have $68,000.00 that will have to be reported as ordinary gain, correct?" I believe this is more correct than not, jainen's nonconcurrence notwithstanding. When you exchange from section 1250 (i.e. depreciable) real property into non-section 1250 (i.e. non-depreciable) real property, even though both are real estate, my [faint I admit] recollection is that there's a code section or regulation or ruling that forces recognition (maybe only as unrecaptured section 1250 gain, and *not* ordinary income, in this case) the accumulated depreciation on the surrendered property, even though *all* the requirements of the section 1031 exchange have otherwise been met. If it weren't midnite thirty I would go find the ruling. Maybe jainen is in a different time zone and is still awake and would go look for it....

[les grans]

See IRC section 1250(d)(4)... and I think there's a reg, too, maybe...

[jainen]

>>See IRC section 1250(d)(4)... <<

Like I said, there are too many issues to resolve before Tuesday. Nevertheless, time zones notwithstanding, the section you cite says it only applies to "the amount of gain recognized." In other words, the boot.

1031 is extremely powerful. It defers ALL gain, capital or ordinary, including recapture of normal or even excess depreciation and 179 expense, as well as personal profit like mortgage-over-basis and the old Section 125.

[les grans]

>>See IRC section 1250(d)(4)... <<

Like I said, there are too many issues to resolve before Tuesday. Nevertheless, time zones notwithstanding, the section you cite says it only applies to "the amount of gain recognized." In other words, the boot.

1031 is extremely powerful. It defers ALL gain, capital or ordinary, including recapture of normal or even excess depreciation and 179 expense, as well as personal profit like mortgage-over-basis and the old Section 125.

Here's the example I was trying to resurrect; it's from the NYSCPA (?) website. Seems if the apartment house that OP exchanged for land had been nonresidential, like a factory or office building, we'ld have *ordinary* income as there's a piece of section 1245 which trumps section 1031.

I'm quoting the following although I haven't given myself a chance to read it thoroughly. "Dictated not read" as any good CYA attorney would say...

"What's worse, if the investor's building is commercial property, he will wind up with $700,000 of currently taxed ordinary income. Commercial property placed in service after 1980 and before 1987, and depreciated by an accelerated method, is considered IRC Sec. 1245 property. Under IRC Sec. 1245(a), all depreciation claimed is recaptured as ordinary income on a disposition, up to the gain realized in the transaction.

"The IRC Sec. 1031 exchange does not protect the investor. There is IRC Sec. 1245((4) recapture even though the property is disposed of in an IRC Sec. 1031 exchange. The amount recaptured cannot exceed the sum of 1) any gain recognized on the transaction, plus 2) the FMV of property acquired that is not IRC Sec. 1245 property, and that is not taken into account in computing recognized gain. In the example, the investor will have fully taxed ordinary income of $700,000 regardless of whether the transaction is tax-deferred under IRC Sec. 1031.

"There may be a more fundamental problem for a taxpayer who wants to exchange nonresidential property that 1) was bought after 1980 and before 1987, and 2) was depreciated using accelerated depreciation. If the property is exchanged today for a commercial or residential building and land, the property received will be part land and part IRC Sec. 1250 properties.

"A technical reading of the statute calls for a full recapture when IRC Sec. 1245 property is replaced with non-IRC Sec. 1245 property."

[jainen]

>>cannot exceed the sum of 1) any gain recognized on the transaction<<

That's what I said. In a 1031 exchange, you only RECOGNIZE gain from non-like-kind property, also known as boot. Section 1245 generally refers to personal property, but frankly I think it odd that your source would consider Section 1245 real estate to not be like kind to other real estate. The courts have made it clear that "like kind" is a description of the character of the property, not its use or quality. I've never researched the question, though, so I suppose he's following one of the many 1031 court rulings. Also note that a lot of commercial or industrial property is specifically "segregated" as personal property to take advantage of accelerated depreciation.

In any case, your quote confirms my position. Section 1031 defers all gain derived from like kind property; you are only taxed on the boot.