Sorry. I just do not understand your more recent question and how it differs from your first question.
Do keep in mind that some 1031 details do not necessarily “make IRS sense.” For example, normally the IRS has no interest in how you allocate your money – whether you pay cash for a purchase or you bank the cash and borrow other funds to make the purchase – but they certainly do care about this allocation in a 1031 exchange – and you will end up owing tax in the current year if the cash received exceeds the expenses of doing the exchange.
If you take another shot at asking the question; I will take a shot at answering. BUT, KEEP IN MIND, THESE ARE MY EDUCATED GUESSES – I AM NOT AN ACCOUNTANT. You might try getting some other opinions by calling some 1031 facilitators.
If I sold an investment property, would the replacement have to be at least the same amount, or would costs directly related to the sale, such as commissions, transfer taxes, lawyers fees, and 1031 exchange fees reduce this amount?
So if I sell a $215,000 investment and incurr $15,000 on real estateand legal fees,then buy a $200,000 investment replacement there will be to capital gains tax?.
I’m not an accountant, but I do have 1031 exchange experience as an investor. I do not so quickly accept Mr. Krulac’s response and your example based on it.
IRS Form 8824, used for reporting like-kind-exchanges, reads as follows in line 15: “Cash received, FMV of other property received, plus net liabilities assumed by other party, reduced (but not below zero) by any exchange expenses you incurred (see instructions).”
Unless there is non-like-kind (“other property”) involved, then the -$15,000 difference between selling price of the relinquished property and cost of the replacement property is realized by you as either “cash received” or “net liabilities assumed by other party”. So, it looks to me like Form 8824, line 15 does let you subtract the $15,000 expenses. Carrying this through the additional steps of Form 8824, it looks to me like the $15,000 in the original question gets captured in the Basis of Like-Kind Property Received, but that it is not subject to capital gains tax in the year the exhange occurs; however, it will eventually be taxed as capital gains when the second property is converted back to cash.
Would Mr. Krulac (or anyone else) please comment on my understanding of the way that Form 8824 works.
Your response sounds more like the truth, not because I am knowledgeable, but because it makes IRS sense. It would be to simple to reduce the value of the first property, there would be no taxes generated. Sounds like from your explanation there will be no taxes now but there will be later. Better later than never, that sounds like the IRS.
Another question, if you could indulge me. My replacement is going to be a number of less expensive rural homes, so there will be substantial prepaids/points/closing costs, maybe $10-15,000. These costs will become expenses sooner or later, but I don’t have the money for them now so will need to take that out of exchange proceeds which will generate a capital gain. Is most or all of this going to wash the first year, or am I creating a monster?