Another 1031 question

[Julie]

Taxpayer has a 1031 exchange with boot paid in installments. I think I have the exchange right (that's the part I have little experience in), but I'm having trouble getting the 6252 right. The IRS instructions make the sale appear to be a loss, when it should have a recognized gain. So that means I'm doing something wrong.

Premises:

TP bought commercial building in '01, adjusted basis approx 80K

Exchanged in '07, FMV275K, for new apartment building FMV200K. 3rd party exchange done through intermediary.

$137K was paid in '07, $75K was applied to apt building and the remainder is to be paid later. TP has $125K mortgage on the apartment building.

Or is the entire gain disqualified from 1031 treatment because of the mortgage?

What should the 6252 look like?

Thanks,

Julie

[jainen]

>>3rd party exchange done through intermediary<<

I would not trust a client's description of this transaction. Insist on seeing ALL of the sale and exchange documents. My first impression is that only $75K went through the intermediary and into the replacement property. That leaves $200K as boot, which exceeds the $195K gain. By that math it is a fully taxable sale. Since no gain is deferred under Section 1031, you can ignore the exchange structure and report the entire thing as an installment in the ordinary way.

[Julie]

Okay....I think that explains why this didn't seem to be working. Yes, it appears to me from the closing statements that only $75 was passed into the replacement property. Thanks, jainen.

>>3rd party exchange done through intermediary<<

I would not trust a client's description of this transaction. Insist on seeing ALL of the sale and exchange documents. My first impression is that only $75K went through the intermediary and into the replacement property. That leaves $200K as boot, which exceeds the $195K gain. By that math it is a fully taxable sale. Since no gain is deferred under Section 1031, you can ignore the exchange structure and report the entire thing as an installment in the ordinary way.

[jainen]

>>it appears to me... <<

Yes, but good luck with your client. He probably has some different math, like "The new property is worth $200 thousand and that's more than the total gain, so NONE of it is taxable and all the installment payments are tax-free too!" Then he'll go into a rant about paying for the most prestigious intermediary and all the lawyers that approved this. And the best reply you can muster will be, "Gee, I wish you had called ME first."

[Julie]

He's a new client. We'll see if he comes back after this. The amount spent on the exchange is pretty close to the taxes due without it.

Thanks again!

>>it appears to me... <<

Yes, but good luck with your client. He probably has some different math, like "The new property is worth $200 thousand and that's more than the total gain, so NONE of it is taxable and all the installment payments are tax-free too!" Then he'll go into a rant about paying for the most prestigious intermediary and all the lawyers that approved this. And the best reply you can muster will be, "Gee, I wish you had called ME first."

[jainen]

>>He's a new client. We'll see if he comes back<<

Ahh, well. Apparently he didn't go back to his last preparer. I wonder why not.

[kcjenkins]

Or he DID go back, did not like the outcome, and decided to 'shop it around' until he finds a more appealing answer?

[jainen]

>>"Government is not reason, it is not eloquence, it is force; like fire, a troublesome servant and a fearful master. Never for a moment should it be left to irresponsible action" -- George Washington<<

If George is so smart, how come he didn't tell us this BEFORE we got into such a mess?

[kcjenkins]

Unfortunately, telling us was not enough, we have to listen to him before it does any good. These days, kids are only taught that he was the first president, and he cut down a cherry tree as a kid. That's about it as far as todays history books used in the schools go. We would probably have a much better citizenry, if all school kids were exposed to his writings and speeches, in full, during their formative years. He was a great leader, it's a shame he's been allowed to be diminished into just a symbol, rather than having our kids exposed to his thoughts and hopes for our country.