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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2325
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Hi, I just read in your web page under DEPRECIATION RECAPT-

Customer Question

URE FOR LIKE-KIND EXCHANGES that you do not have to report income if it is carried over to the acquired property. I would prefer to pay the recapture portion over time instead of lump sum. please give IRS rule which authorizes the carry-over to acquired property instead of lump sum payment. Any other suggestions?
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

Dear tooth,

Someting is not tracking with your question. Can you give me a bit more information?

Are you selling a property in a like kind exchange?

Is this a rental property?

I just need to know more about your circumstances.

The reason?

Customer: replied 6 years ago.
1.Yes, I have slready done a 1031 exchange.Now we are talking about paying the recapture on the depreciation to the IRS. It would be a hardship to pay it all at once.
2.yes, it is a commercial retail rental property.
3.I have had the property since 1983. My accountant said I must pay all the recapture this year and that I will not be able to depreciate the replacement property which is new. I was not aware of these 2 facts when I went into the 1031.
4. The article I referred to in my question was in
WWW.real-estate-owner.com/depreciation-recapture
Expert:  Ed Johnson replied 6 years ago.

DearCustomer

Thank you for hte additional information.

That article and its references are correctd and accurate information. While the information at that site is dated 2005, it is still valid today.

According to IRS Publicaiton 544, you do not pay the recapture at this time, as lolng as your like kiknd exchange is a true exchange.....meaning,, the acquired or exchang property is equal to or greater in price (value) to the old (exchanged) property.

There are other qualifiers for this to be completely tax free (tax deferred actually) exhange.

http://www.irs.gov/pub/irs-pdf/p544.pdf

Depending on the relatilonal charachter of the two properties includiing use, they may not be treated the same.

ALSO, if part of the value of the exchange property was section 1235 property, because the section 1235 portion of the new propery is not the same class, then the value the exchange would reduced, and you might still have to pay recapture on depreciation.

Recapture mahy still apply in your situation:

From the IRS frequently asked questions.

Recapture in 1031 Exchange. In §1031 exchange, , to the extent that there is gain to be recognized. then the 25% depreciation rate is applied to 1250 depreciation,.

They are talking about EXCESS depreciation, where accumulated depreciation exceeds the straight line method.

This is a tax trap, that you and other tax payers are rarely aware of.

The IRS rules indicate that there is normally no loss of gain on the exchange of lke kiknd properties if they meet the entire rules, even if you pay money. lHence there would not no loss carryover. The cost basis of the new property becomes the cost basis fo the old pluse hte orignal cost of the new properyt plus amoney paid.

So everyting is factored in.

http://www.law.cornell.edu/uscode/26/usc_sec_26_00001031----000-.html

What I would do in your situation, is ask the CPA to do a cost allocation study on the property, to make sure you are not paying recapture on things other than excess depreciation, and to reduce any recapture tax. you may benefit from that.

Here is a summary:

1. If any of the exchange inclouded an asset class not considered like kind, then there would be a gain, and the property may not qualify for a tax-less exchange, there for requireing depreciation recapture.

2. Even if it is otherwise a taxless exchange, you have to pay recapture on any excess dedprecation than it would have been under straignt line depreciation.

3. If you bought down on the exchange, that is the new property was less value, this will not be a tax-less exchange,and you will have to pay recapture tax on the current year tax return.

4. If you bougth up or at equal value, then you would in most instances be a taxless exchange and not have to incur a recapture tax at this time.

I have no idea why your CPA is saying you can not take depreciation on the acquired property.

The idea is that the cost basis of the old home is rolled over to the new home, so you continue depreication as if you still owed the old home. With the exception of paying recapture on excess depreciation, yiou continue to deprecdiate the old property as if you still owned it, AND you treat the new property as if it were an addtion to the old, depreciating its value. You seperately track the deprecaiton, for each as you will need to segregate the recapture tax when you dispose of the exchange property.

Agaiin the exception is if it is a trade down.

Customer: replied 6 years ago.
Hi Ed,

I have not found my answer in the material you sent yet. Your answer was a 38 page document and the other was 4 pages.

I am still having to read through all the pages to find an answer. It is taking me a long time to find the answer if it is there. What I was wanting was the specific paragraph and discussion, not a document where I have to dig it out myself. I didn't need you to point to a mass of documents. I can do that for myself.

Also you have not read your own answer. If you had you would have noticed that many of the word are mis-spelled which makes it difficult to get your meaning.

Yes, I would like another persons' reply to my question who would correct the above shortcomings. I would then gladly accept the answer knowing there had been some thought and effort put into the answer.
Expert:  MequonCPA replied 6 years ago.

DearCustomer-

Ed has asked me to respond to your questions.

Before I proceed, could you provide some additional information.

1. Fair Market Value of the property given up.

2. Fair Market Value of the property received.

3. Any debt assumed by either party.

4. Any cash paid or received.

5. Cost and improvements of property given up.

6. Depreciation taken on property given up.

Exact numbers aren't necessary, just ballpark amounts so that I can fully understand your situation.

Thanks.

 

Customer: replied 6 years ago.
Hi Steve,
I sent you an answer but was told that I sent it incorretly to you. I did not use the answer box,
I want to use correct figures but need to ask my CPA. I learned that he is on vacation and will return next Wednesday 5/14/08. As soon as returns and gives me the info I will send it to you via this question box.
thanks- XXXXX XXXXX
Expert:  MequonCPA replied 6 years ago.

Robert -

I'll be happy to help when you're ready.

Customer: replied 6 years ago.
I will be happy to when we are finished
Thanks RS
Customer: replied 6 years ago.
Hi Steve- I just got the answers from my accountant.The # XXXXX to the # XXXXX your question.
!, $1,985,000-sec 1245 property included
2. $1,996,528.-sec 1245 property included
3, none
4. $30,000 earnest money paid on new property.
5. $782, 801. sec 1245 property included
6. $682,801. sec 1245 property included
I will be happy to acccept when we are done.
Thanks- Bob
Question- Do I have to pay the recapture at time of exchange or may I pass it on to the new replacement property? Please give authority
Expert:  MequonCPA replied 6 years ago.

Bob -

Is there a breakout of the 1245 property on either the sale or purchase. If so, please provide details of allocation (1 & 2) and the allocation of basis (5 & 6) between 1250 and 1245.

Thanks

 

Customer: replied 6 years ago.
Steve,--I have asked my CPA your queations.He wrote the figure $96,676. over your questions
#1,5,& 6, I don't understand what that means. I can't reach him now. We are going to have a meeting tomorrow mourning at 9:00-Albuquerque time. I will ask him then and write to you soon after.
Bob--Thanks
Expert:  MequonCPA replied 6 years ago.

Bob -

What I'm trying to find out is what is the amount of 1245 in the property received (#2) the FMV property given (#1) and in the basis (#5) and in the accumulated depreciation (#6).

Customer: replied 6 years ago.
Steve sorry for difficulty.
1.FMV-$1,985,000    sec 1245 is $96,676        depreciation on property given up.(1245)
2. $1,996,528. FMV property received
5.782,801 (1245 sec $96,676
6.682,801 (1245)sec $96,676
My Question is
1. My CPA said that sec 1245 recapture (96,676)must be paid now,at exchange,and cannot be rolled-over into received property,
2. He said that I cannot depreciate the received property. Are these statements correct? please give me the rule.
Bob S
Expert:  MequonCPA replied 6 years ago.

DearCustomer-

The terms of Section 1031 require that you exchange property for like kind property. Thus the Section 1031 applies separately to the exchange of real estate for real estate and personal property for personal property.

From what I can see, there would be no depreciation to take on the real property because you have exchanged on an almost dollar for dollar basis. You would only have depreciation if the Fair Market Value of real estate you acquired was more than the Fair Market Value of the property given up. In that case you would had had to either add cash to the transaction or take out a mortgage. Even in that case, only the excess would be depreciable.

You have fully depreciated the real property. The total cost was $685,125 and the depreciation taken was $585,125 the $100,000 difference would normally be the land which is not depreciable.

If your exchange included segregation of the 1245 property from the real property and the value placed on the 1245 property was $96,676 then your accountant is correct.

In reality if the cost of the 1245 property was $96,676, in all likelihood its current fair market value is something less than that. That value is what would need to be recaptured at the time of the transaction.

In theory there is also some section 1245 property included with the real estate you acquired. If this is the case you may also be able to defer the income on that portion of the transaction too. This is similar to when you trade in a car used for business, you continue to defer the gain/loss until ultimately sell the vehicle.

Customer: replied 6 years ago.
Steve,
I do not understand your answer fully and have some questions for you. I must leave town for the weekend now and will return MOnday.I will hit the accept button now if you promise to talk to me about this when I return Monday. You have been very patient with me. My CPA has not been as patient.
Let me know if we can talk when I return.
Bob S
Expert:  MequonCPA replied 6 years ago.

Bob -

No problem. I'm doing some traveling this weekend also.

Customer: replied 6 years ago.
Hi Steve.
We are leaving right now but when you answer please send the authority and your answer.
Thanks- Bob S
Expert:  MequonCPA replied 6 years ago.

Bob -

I've returned from my trip.

What additional questions did you have.

Customer: replied 6 years ago.
Steve,
Now that we are both back we can continue.(Please review My previous questions First)
My CPA says I must pay taxes on $97,000 of Sec 1245 depreciation from the 1031 exchange I have done.(above) The 1031 intermediary thinks I do not have to pay it now.( hope he is right) Please tell me who is right and send me the IRS ruling the supports your answer.
Bob Sanchez
Customer: replied 6 years ago.
Steve,
Please answer my last questions?
Bob S
Customer: replied 6 years ago.
Steve,
Third request
Please answer my questions or if you prefer not to than return my money and I will not bother you again.
Bob Sanchez
Customer: replied 6 years ago.
Steve,
4th request to return my money for not answering my question. If you do not return my money,I will start a big stink with JUST ANSWER.
I have never pressed the accept button. You have never answered my question only given me a guess.
XXXXX XXXXX
PS- Have an official of JUST ANSWER reply to ths email

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