1031 exchange

[grandmabee]

rental house cost 24000

deprec taken 16000

adjusted basis 8,000

plus exchange cost 11,000

final basis 19,000

new property received cost 150,000

cash received 40,000

differed gain 131,000

recognized gain 40,000

basis of new rental 19,000

old rental sold thru exchange process for 200,000

so am I right in thinking the 40,000 is capital gain and new rental is set up of deprec sched at 19,000 ?

I would appreciation anyone thougths on this.

[kcjenkins]

Yes, you are correct, the basis of the new property is the basis in the old one, plus costs. I think your math is off, to get a cash balance of $40K he must have sold it for $201K. And the gain is recognized to the extent of the cash received. As a long term capital gain. But the first $16K is 'unrecaptured Section 1250 gain' which will be taxed at a maximum 25% rate. And of course we are always assuming that everything was done exactly right on the exchange, including timing.

[jainen]

>>new rental is set up of deprec sched at 19,000 <<

That's an election you can make for convenience, but it reduces the depreciation deduction to spread the whole $19000 over 27.5 years ($691 per year). The standard way is to simply continue the old depreciation schedule for the $8000 exchange basis ($872 per year for nine more years). The additional $11000 basis can then be set up for 27.5 years at $400 per.

It's more complicated to carry two schedules on the same property but with your numbers you almost double the deduction that way. In fact, you probably more than double it when you allocate part of the basis to land value on each schedule, because I'm sure the land is a much larger percentage of the current purchase than it was eighteen years ago.