Selling a property acquired through 1031 exchange

6 Replies

All 1031 experts!

I sold a condo in 2006 and used a 1031 exchange to buy a townhouse.  This year we will sell the townhouse.  I'm having a hard time calculating the taxes owed.  Depending the taxes, we may just to another 1031.

Here's some estimated numbers from 2006 (from Form 8824):

FMV of condo: $196000

Adjusted Basis of condo:  $104000

FMV Townhouse: $353000 (proceeds plus cash from Home Equity Loan)

Realized gain (line 19):  $249000

Deferred gain:  $249000

Basis of townhouse (line 25):  $104000

SO,

What happens when we sell (may net about $300k)?  Other information:

Capital improvements 2007-2015:  $50000

Depreciation $7000 per year

Thank you!!

Originally posted by @Janice R. :

All 1031 experts!

You will pay 25% on your depreciation recapture.  Federal Capital Gains will most likely be 15% but could run 20% on your profit.  The IRS now charges a tax for medicare of 3.8%.  You may not meet the threshold for that.  You also would incur state capital gains tax if the state the property is in has state capital gains tax.  There are several exchange guys on here that will probably at more to this.

Mark

@Mark Creason

Thank you - also, I'm not sure that the Form 8824 is correct. The thing I'm not understanding is why my deferred gain includes the HELOC cash to buy the townhouse (HELOC was from my primary residence).

My accountant thinks I will not owe any tax because I will sell the townhouse at a loss.  This does not seem correct.  

Any thoughts would be appreciated!

@Janice R. There's something a little suspect in those 8824 numbers and your accountant needs to go over that thoroughly to verify numbers.  I suspect that when all is said and done they may be closer to right than you think.  You've got the gain from your condo sale that carried over in the 1031 but that will be offset in large part by the capital improvements and loss on the sale of the townhouse.

Either way you will have depreciation recapture so don't neglect that.

Originally posted by @Janice R. :

All 1031 experts!

I sold a condo in 2006 and used a 1031 exchange to buy a townhouse.  This year we will sell the townhouse.  I'm having a hard time calculating the taxes owed.  Depending the taxes, we may just to another 1031.

Here's some estimated numbers from 2006 (from Form 8824):

FMV of condo: $196000

Adjusted Basis of condo:  $104000

FMV Townhouse: $353000 (proceeds plus cash from Home Equity Loan)

Realized gain (line 19):  $249000

Deferred gain:  $249000

Basis of townhouse (line 25):  $104000

SO,

What happens when we sell (may net about $300k)?  Other information:

Capital improvements 2007-2015:  $50000

Depreciation $7000 per year

Thank you!!

Hi Janice,

The numbers do not make sense.  You sold the condo for $196,000 and had an adjusted cost basis of $104,000, so the deferred gain should be only $92,000.  It looks like you traded up in value by acquiring the townhouse for $353,000, so the adjusted cost basis of your townhouse would not be $104,000, but $104,000 plus the increased cost of the townhouse adjusted for certain closing costs.  Your accountant needs to review the numbers before you proceed.

BTW, I changed accountants after 2006 (who did the 8824) to my current accountant.  I have talked to my current accountant about this issue and says that the tax bite would be minimal in my situation.  But, that's from a quick assessment.  

@Bill Exeter - Thanks - it seems right to me!