1031 Exchange vs Straight out Sale

[Alex]

Client did at 1031 exchange thru a qualified intermediary. Deferred gain is so small, she would have paid less taxes if it was just a sale and not an exchange.

Is it possible to report it as a sale? That way we could free up the suspended losses and client does not end up with a huge tax liability. Not sure if that's a red flag (is that legal to do?) or if it will bite us later?

 

 

 

 

 

[Richcpaman]

Its an election.  It is not mandatory.

She started it, but did not finish it.  Pay the tax. 

Rich

 

[Alex]

Thanks @Richcpaman!

I elected out (did the Election under section 1.168-6) and indicated that the property was disposed of in 2018, freeing up the losses.

Follow up question on basis:

Would the basis of the new property be the purchase price minus the deferred gain plus exchange expenses? $400k - $130k = $270,000 + $25,000 = $295k (basis of replacement)

Here is what I have (approximations)

Cost of Property Given Up:  $450,000

Depreciation Taken: $150,000

Adjusted Basis: $300,000

FMV of Property Given UP: $430,000

Cost of Property Received: $400,000

Exchange Expenses: $25,000

 

 

 

 

 

[bbstacker]

Why wouldn't the basis be the cost of the replacement property purchased?  You elected out of the installment sale and have treated the transaction as a sale of Property A and a purchase of Property B.  With the election out of the installment sale there is not deferred gain, it was recognized and realized with the election.

[grandmabee]

You elected out of the 1031 exchange.  Basis of new property is cost plus buying expense.

[Alex]

Ah - sorry if I wasn't clear, I meant the basis of the new property if it was a 1031 exchange and not a straight out sale. My mind's a bit scrambled this week!