Paying Tax That Was Deferred by a 1031 Exchange - Posted by Hawkster

import · November 22, 2006, 7:06pm

Posted by Hawkster on November 23, 2006 at 05:55:26:

Thanks! Your opinion is consistent with mine.

Note: I normally prepare my returns using TaxActOnline.com – so it’s not a paper form and hand-calculator process. I definitely am researching this at irs.gov. But, I like to gather opinions from forums such as this to expand my vision of the various ways people could approach this situation. When I paid the accountant $1200, it was not an entirely simple return; in fact, it was the year that I did the original exchange. However, I had done a lot of research before seeing her and had already prepared a “first-estimate” return. The accountant saved me only $200 above and beyond what I would have paid based on my own first-estimate.

Any other differing or confirming opinions are very welcome. Thanks!

import · November 22, 2006, 7:06pm

Paying Tax That Was Deferred by a 1031 Exchange - Posted by Hawkster

Posted by Hawkster on November 22, 2006 at 20:06:41:

This is a long and convoluted discussion, but I would appreciate any insights you may have.

In 1978 I bought a house and live in it until 1982, paying $80,000 for it. In 1982, I moved, but kept the house as a rental property. At the time of purchase, the land value was approximately $20,000 and the dwelling value was $60,000. From 1982 through 1997, I claimed depreciation from an original cost basis of $60,000, on my income tax forms. By 1997, the entire cost basis of the house had been depreciated to zero; and I claimed no depreciation after that time.

In 2003, I sold the property for $400,000 and bought two houses (rental property), each for $225,000, via a 1031 exchange. As I understand it, for tax purposes, the $400,000 was composed of three components: $20,000 that was the undepreciated land value, $60,000 that had been depreciated from the original purchase price and $320,000 that was long term capital gains. If I had paid taxes at the time of sale (rather than defer them via the 1031) the $60,000 would have been taxed as recaptured depreciation and the $320,000 would have been taxed as long term capital gain.

When I bought the two properties in 2003 for a total of $450,000, I added $50,000 of ?new? money to the proceeds of the earlier sale. For depreciation purposes, I assigned a basis value of $35,000 to the each of the new properties bought for $225,000 each. This made the total basis value for the two new houses add up to $50,000 of new money and $20,000 land value from the original purchase ? which seems reasonable.

This year I sold one of the two properties that I bought in 2003. In tax years 2003 -2005, I had taken total depreciation of $500 from the new basis value of $35,000. I sold the property for $300,000. Now, I want to understand what taxes I should pay on the proceeds from the sale of the one property. I believe that I will pay tax at the rate for recaptured depreciation on $30,500 (half of the earlier depreciation plus the $500 recent depreciation), and that I will pay long term capital gains tax on the remainder of the proceeds minus $10,000 (the undepreciated cost of the original land)?

Does this sound right?

Note: I have simplified the actual numbers for the sake of discussion. I am not looking for a way to eliminate, avoid or defer taxes that I owe. I simply want to get them calculated correctly. Also, I understand about ?talking to a tax accountant.? The last time I did that, I paid out $1200 to have the accountant reduce my taxes by $200 from what I had already calculated ? not a good deal! So, I really want to do this myself, unless I find the accountant to be absolutely necessary.

import · November 27, 2006, 10:41pm

You may owe NO RECAPTURE… - Posted by David Krulac

Posted by David Krulac on November 27, 2006 at 23:41:37:

depreciation recapture taxed started as a part of the IRS code on May 5, 1997, or some such date. Therefore if all your depreciaiton was taken BEFORE that May 1995 date, then there is NO depreciaiton recapture. I just saved you $6,000, (the difference between 25% recapture rate and 15% long term capital gains rate.)

import · November 22, 2006, 8:37pm

Re: Paying Tax - Posted by Merez(IA)

Posted by Merez(IA) on November 22, 2006 at 21:37:10:

Now, I’m not completely sure about the distribution of rolled over basis (as in if you can roll over the 20k of the nondepreciable property into depreciable basis; though it seems like you can, because the new transaction is like a sale, at which time you can normally distribute the basis among the various parts/types of property purchased; granted the distribution usually needs to be reasonable). That being said, my understanding is your taxes would be:

30,500 of depreciation recapture
34,500 of non taxable basis recapture (the 35,000 basis minus the 500 of depreciation taken)
225,000 of long term capital gain

Now, the basis will be increased (and subsequently the long term capital gain will be reduced) by any additional capitalized improvements made to the property and if you pay any tax on boot received on the 1031 exchange (if there was any).

That being said, two things. First, the above is just my opinion and should not be considered tax advice (honestly, pay someone or research it on the irs.gov site and talk to 1031 exchange faciliters). Secondly, if your accountant charged you $1200 for a simple return, you definitely need to get a new accountant.