1031 exchange quetion

[Vityaba]

TP does deferred 1031 exchange through a qualified intermediary. All timing restrictions were followed. The problem is that the old property (basis $30K) was sold for $100K while the new was purchased for only $75K. $25K cash was received by the TP after the transaction was completed

Questions:

Does the fact that the new property value was less than the old property value completely disqualify this transaction as 1031 exchange or the TP has to pay tax on $25 recognized gain (for cash received) and increase basis in the new property to $55K (original $30 plus $25)?

Any reference to Reg would be appreciated.

Thank you

[kcjenkins]

Well, the basic rules is that Realized Gain is recognized to the extent of net boot received.

FS-2008-18, February 2008

WASHINGTON — Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.

Here's a link I've found helpful http://www.realtor.org/field-guides/field-guide-to-1031-exchanges

[Vityaba]

I think this answers the question: http://www.law.cornell.edu/cfr/text/26/1.1031(B -1

Based on Example 1 the TP would have to recognize $25K gain. Am I reading this correctly?

[Vityaba]

kcjenkins, you posted a moment before I found in the the reg.

Thank you for your time and efforts

[jklcpa]

I can't follow your link, but you are correct that $25K of gain will be recognized. In your case, the gain is limited to the amount of cash received.

I think your new basis will be still be $30K. (Basis given - less cash received + gain recognized).

[Vityaba]

You are correct, the basis will be $30K. Example in § 1.1031(d) illustrates this situation: http://www.law.cornell.edu/cfr/text/26/1.1031(d)-1

[Mr. Pencil]

Does the fact that the new property value was less than the old property value completely disqualifies this transaction as 1031 exchange

No. This flexibility is what makes 1031 such a great tool. You can either downsize or increase your investment as much as you desire. You can combine or split investments. You can take up to six months to decide if you even want an exchange, and longer to decide you don't want one.

Basis is pretty straightforward when there is no new investment. The $30K adjusted basis just rolls over into the new property, and the SAME depreciation continues as previously scheduled for the remaining life. (That assumes both properties are depreciable over the same life. You may have to make adjustments for the percentage of land value, whether it's residential or not, etc.)

[jshtax]

$30000 basis 45000 deferred and 25000 taxed in current year.