Have a Tax Question? Ask a Tax Expert
When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition.
In short yes, you still must report the gain from the 1031 now that you have sold the replacement property.
Yes, the tax on the original was only deferred not voided or discarded. You trigger all of the deferred gain and depreciation recapture upon sale.
If the property has dropped enough in value (i.e. more than what the deferred gain was), then your deferred capital gain has been wiped out and you would have no tax
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