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1031 Exchanges

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Sheila Zhou
  • Austin, TX
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Tax w/ & w/o 1031 exchange with multiple replacement properties

Sheila Zhou
  • Austin, TX
Posted Apr 16 2018, 20:50

I greatly appreciate any comments/corrections you have on my calculation!

3 properties are involved here. R, A and B.

In 2010, we converted our primary residence R to rental. At the time of conversion, the property R's FMV was $225K, with land valued at $40K. We have been taking the depreciation which is around ($225K-40K)/27.5=$6.7k/year – till now about $68K.

With the increase of property tax and other factors, it no longer makes a lot of sense for us to keep R as a rental. Let’s say we sell R and after the sale related cost (commission, closing cost, remodeling before putting it on mark, etc), we have $325K (part of it has been used to paying off the loan of course). Then the capital gain is $325K - $225K = $100K.

1) If we don’t do 1031, how much tax do we own? I think we are in the 15% bracket (married filed jointly with income between 70K and 400K) for Capital gain. So the tax for that is $100K * 15% = $15K. The recapture of the depreciation is at $68k * 25% = $19K. Did I do my calculation right?

2) If we would like to proceed with a 1031 exchange and replace this property of two properties: property A at $225K (land $40K) and property B at $150K (land $30K) – the ratio of the purchase price of the two replacement properties is at 3:2. My questions are:

a. How would I calculate the depreciation of these two replacement properties? Does property A depreciate at 185K/27.5 and property B depreciate at 120K/27.5 annually?

b. How would I recapture the depreciation upon selling A in the future? In addition to A’s own depreciated amount over the years, I guess I should also add its share (60%) of R’s depreciation of $68K?

c. How would I calculate capital gain upon selling A in the future? Let’s say we get 250K after sale related cost. Is A’s capital gain 250k – 225K + its share of capital gain from R (60% * 100K) = 85K?

Again, your help on this is great appreciated!  I am working toward closing a purchase this month and is wordering if I should do a reverse 1031 exhange.

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