I am 1 year into a property I 1031 exchanged into. I was given an offer to sell (and seller finance) I can't pass up. I understand from 1031 rules that I need to hold the property for at least a year to keep the exchange valid.
My question is how to calculate my cap gains and depreciation clawback on the exchanged property.
I plan to use this number as the minimum down payment requirement on the deal so I'm not out of pocket.
Any help would be much appreciated!
Your basis in your current property is a combination of your basis in the previous property carried over into this property, and the additional cost of this property.
Absolutely talk to a cpa with all the specifics, to determine how much of the principal you receive will be return of basis, depreciation recapture and cap gains.
It basically like you didn’t do an exchange. You’re going to owe the same capital gains taxes you would have if you sold the previous property for this new price, minus the amount this property cost more than the old one, (added to the basis), plus another year of depreciation on the new higher amount.
There shouldn’t be much of a fight with the IRS since they’re getting the taxes you were going to defer.
@Adam Byrne , It sounds like this was an unsolicited or at least unplanned offer. If you can demonstrate your intent to hold the property then the relatively short hold period wouldn't be a problem if you wanted to do another 1031. But the tax is gonna be an issue if you don't. And the owner carry presents an issue as well but one that can be overcome.
Your basis in the first property you exchanged is what went forward into your new property. and the difference between that basis the net sales price of the property you're anticipating selling now is what your gain will be - made up of depreciation recapture and gain. You should be able to get your new starting basis from your 2018 tax return which your accountant reconciled by filing the from 8824.
When you're calculating the tax hit to structure the down payment you'll want to figure that you'll probably have to recapture all depreciation recapture (all the way back) in the year of the sale.
Depending on circumstances it may be possible to sell using an owner carry but also do another 1031 exchange. So you get the best of all worlds = the sale you want, some tax free income (only taxed on the interest), and complete tax deferral again on all the gain.
I want to publicly thank Dave Foster, who is the MAN when it comes to 1031 exchanges. Dave, thanks for your help on my last 1031. You're proving again why I chose you in the first place. I'd love to pick your brain on this best-of-all-worlds situation.
Kind words @Adam Byrne , You've been killing it. And this time around we'll all be looking for a blog post on how to combine owner carry financing with a 1031 exchange - Kudos!!
Adam- I agree with you that Dave is the 1031 GUY. He is helping us with our second 1031 in the last 4 months. He is knowledgeable, reachable and puts the process in words anyone can understand. Let's convince him to do a podcast on 1031's.
Dave- Thanks again for all your support and assistance in our REI endeavors!