Like Kind Exchange and form 8824

[Marie]

Can not get this form to work for me. Spent an hour last nigh.  Very frustrated. 

sold property for $612000, put $300000 in escrow for exchange ( had $45000 as profit to pay on ).  purchased new property for $510,000  basis should be $210000.  worked with the Sch D and the 8824 and nothing came out right.  Any one have some help for me?  please?

[Marie]

not sure how to mark the Sch D so it shows as a like kind exchange?  is that where I start?

 

[Lee B]

Your basis in the new property is reduced by the capital gain deferred from the sale of the first property.

Just follow the Form 8824 Instructions.

[Marie]

I HAVE READ AND READ AND CAN'T GET IT TO GO   MAYBE I'M MISSING A WORKSHEET? 

HE NEEDS TO PAY ON $34500.  tHIS AMOUNT WAS NOT IN THE HELD FUNDS FOR THE 1031  WHERE DO I REPORT THAT?

[Marie]

OK,  SOLD PROPERTY FOR $612,OOO  COST WAS $277500 = PROFIT OF $334500  HE DEFERRED $300000.  SO? HE NEEDS TO PAY CAPITAL GAINS ON $34500.  hE BOUGHT REPLACEMENT PROPERTY FOR $510000.   SO BASIS OF NEW PROPERTY IS $210,000   I CAN'T GET THE NUMBERS IN THE RIGHT PLACES.  PLEASE HELP ME!!

[Marie]

INSTRUCTIONS SAY TO PUT IN SALE PRICE ON LINE 15, AND LINE 15 WON'T TAKE A NUMBER.  SEEMS LIKE IT COMES FROM SOMEWHERE ELSE, BUT I CAN'T FIND

 

[jklcpa]

This transaction has multiple problems going on. Client created "boot" by not investing enough (not trading even or up), client only put $300K of the $612K in escrow(any time seller touches money it has potential to create up to that much recognized gain), and client doesn't have the deferred gain that you think he has. Also, this may be only a partial like-kind exchange.

 

[Marie]

SO, CAN YOU HELP ME DO SOME FIGURING OUT. Not me, but I think he was told this would work.  he put into escrow the profit he made.  then went and purchased another property.  

 

[Lee B]

I originally assumed that your description of what happened was just imprecise.

However your posts imply that he sold the original property, personally received the proceeds,and then put $300,000 into escrow.

If that is what happened then he received very bad advice. In which case his receipt of the proceeds poisoned the 1031 exchange.

The timeline and procedures for properly executing a 1031 exchange are very precise.

 

 

[Marie]

When selling the original property, it sold for $612000, $300,000 was automatically put into escrow at that time for a like kind exchange.  He had no access to the $300000 until he purchased the replacement property and it was wired to the owners of the property he purchased.

[Lee B]

Did he use a Qualified Exchange Intermediary?

Even if he did, I think Judy's post nails your problems.

51 minutes ago, Marie said:

When selling the original property, it sold for $612000, $300,000 was automatically put into escrow at that time for a like kind exchange.  He had no access to the $300000 until he purchased the replacement property and it was wired to the owners of the property he purchased.

I assume that you have never dealt with a 1031 exchange before, because the way you describe things is so imprecise,

it's hard to understand what may or may not have happened, which makes it very difficult to help. Good Luck!

[Marie]

USED QUALIFIED INTER.  I have done a couple.  but they put all proceeds in escrow, not just part. and purchased more than they sold.  Are you thinking there is no way to defer his gain? 

[Marie]

can I do a partial like kind exchange? 

[jklcpa]

Maybe start by reading this on how partial exchanges and boot can occur. It's a fairly easy read but only an overview: https://learn.roofstock.com/blog/partial-1031-exchange

This one on rules of boot is more detailed and gives some examples of the traps that one can inadvertently encounter in the 1031 process: https://www.efirstbank1031.com/advancedTopics/rulesOfBoot.htm

Sorry, I don't have much time today to work through numbers. Maybe I'll be back late tonight but make no guarantees to have time then either. 

[jklcpa]

Yes, he can do a partial 1031 exchange, however as I said earlier, he has bigger problems and larger gain that you initially thought.

Here's what I think, and someone feel free to correct anything that I have wrong. What I say here is based on the facts you provided and assumes there is no debt on the property sold or the property acquired and also doesn't take into account any closing costs.

In a full tax-free exchange, the sale price $612,000 less adjusted basis of $277,500 = realized gain of $334,500. That is the maximum that could be taxed in a sale. Then you have to calculate the recognized gain. If the seller reinvests all sale proceeds, all is fine and there is no recognized gain, but your client reinvested only $510,000, so that alone creates boot of $102,000 and would be the taxable portion of gain if all of the sale proceeds were held by the qualified intermediary, but that is not what happened.

The problem your client has is that only $300K was held by the qualified intermediary and he took the remaining funds of $312,000.  This is the big problem.  At that point where the client purchased the property with FMV of $510K, only $300K of the sale proceeds were used, and taxpayer bringing the other $210,000 of cash to the transaction does not remedy this.  As I said in an earlier post, any time the taxpayer touches the money before the 1031 exchange is completed is a problem! 

Because he took the $312,000 of sale proceeds, I think the gain to be recognized as taxable is the lesser of the realized gain of $334,500 or the cash he took out, so I think he has a taxable gain of $312,000. 

Maybe someone else will correct this if my thinking as wrong, but there is definitely more than the gain you initially thought it was. 

 

[jklcpa]

If my reasoning above is correct, then I think the basis in the new property is $487,500.  That is the $510,000 paid less the deferred gain of $22,500. 

This basis makes sense if you think of property give up with adjusted basis of $277,500 plus the cash outside of escrow of $210,000 that he had to use. 

Again, maybe someone will correct me if I am all wrong. 

[DANRVAN]

4 hours ago, jklcpa said:

In a full tax-free exchange, the sale price $612,000 less adjusted basis of $277,500 = realized gain of $334,500.

The amount realized for the 1031 is the fmv of the property received plus the cash received= 510,000 + 312,000 = 822,000

That is reduced by what he gave up: property with basis of 227,500 and cash paid 200,000 = 437,500

Therefore the realized gain is 822,000 less 437,000 = 384,000.

As you mentioned he recognized gain in the amount of boot received = 312,000.

That leaves a deferred gain of 384,500 - 312,000 = 72,500.

The basis in the replacement property is  510,000 - 72,500 = 437,500   (or 227,500 + 210,000).

[jklcpa]

Thanks, Dan.  I was way off on the first line, but you had a couple of errors in the figures that I've corrected in bold. I fixed up the basis and cash outlay, and this does come back to the deferred gain and basis in the new property as I'd calculated above. 

I do have one question for you though.  In your first and second lines, why isn't the $300K held in escrow included in the amount he received and why isn't it included in the amount he paid for the new property?  

Quote

The amount realized for the 1031 is the fmv of the property received plus the cash received= 510,000 + 312,000 = 822,000

That is reduced by what he gave up: property with basis of 277,500 and cash paid 210,000 = 487,500

Therefore the realized gain is 822,000 less 487,500 = 334,500.

As you mentioned he recognized gain in the amount of boot received = 312,000.

That leaves a deferred gain of 334,500 - 312,000 = 22,500.

The basis in the replacement property is  510,000 - 22,500 =   487,500 (or 277,500 + 210,000)

 

[DANRVAN]

46 minutes ago, jklcpa said:

I do have one question for you though.  In your first and second lines, why isn't the $300K held in escrow included in the amount he received and why isn't it included in the amount he paid for the new property?

We took two different approaches to this and they are both correct, except I read the basis number wrong.

In regards to the 300,00, he did not receive it, it went to the buyer, so it is was not realized in regards to the "exchange".

From the perspective of the exchange, his new basis is the old basis plus what he paid in cash; or you can look at it as the 300,000 + 210,000 -22,500.   Either way you come up with the same answer.