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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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If I sell a 1031 property that I bought as a 1031 exchange

Customer Question

If I sell a 1031 property that I bought as a 1031 exchange and I want to sell it. What is the math I must use for reporting the sale to the IRS? Please advise.
Submitted: 10 months ago.
Category: Tax
Expert:  Stephen G. replied 10 months ago.

Well, if the 1031 was done correctly, and I presume it was, your tax basis in the replacement property that you now want to sell, is the same as the tax basis in your old property. The would presume that you did a straight exchange.

So when you sell the property you now own, your gain is based upon the gross selling price of the property you are now selling less the substituted tax basis from the old property less the cost of sales, commissions, legal, closing costs of the property that you are now selling.

If you made any improvements to the property you are selling that you didn't expense, that would decrease your gain and your gain would be increased by any depreciation allowed or allowable on the property you are selling.

So basically you first have to determine the tax basis of the property you exchanged.

If you purchased that property, then you would take the acquisition cost, plus any closing expenses, plus any improvements, less the depreciation allowed or allowable, plus any expense of the exchange and you would then have your starting point in determining the tax basis of the property you exchanged, which also becomes the beginning tax basis of the property you are now selling.

To that total you would add any improvements, subtract any depreciation allowed or allowable, & add any selling expense of the property you are now selling (legal, deed stamps, commissions, etc.); that would give you the adjusted basis of the property being sold.

You subtract that total from the Gross Selling Price and you have the taxable capital gain on the sale.

If you have any questions, I'll be happy to address them.

Steve G.

Customer: replied 10 months ago.
This is too confusing for the layman. I bought the first property at $36K and sold for $215 less commission and 1031 fees. I bought the second property for $342 and it is now worth about $215. I have been taking depreciation for about 7.5 years on the second property. Please give me a math example.
Expert:  Stephen G. replied 10 months ago.

First property 36K less any depreciation + 1031 fees + sales commission= Tax basis, no figures so use 36K

Sold for 215 - 36 + - adj = 179 gain

Replacement property:

342 cost - 179 deferred gain = 163K less dep* = adj basis

*the 163k must be reduced by the depreciation claimed on the replacement property. Would need Land/Build breakdown to determine correct depreciation; what matters is what you claimed for deprec. on new bldg.

If you sold replacement residence for 215. less 163 = 52 gain plus whatever depreciation you claimed on replacement residence. Possibly 30K-50K ? which would increase taxable gain to 82k - 102k.

Unfortunately when you are dealing with 1031 exchanges & carryforward basis/depreciation etc., it can't be reduced to a simple math problem. Too many variables.

You probably would be well served to obtain professional assistance to prepare your tax return for the year of sale.

Expert:  Stephen G. replied 10 months ago.

Just checking in...................

I see that you have had a chance to review my response, but I don't see any follow-up questions?

If you do not have any additional questions, I would appreciate it if you would take a minute to rate my response as that is the only way we receive credit for our work.

Thanks very much,

Steve G.