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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7197
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Where do I report the adjusted basis of a replacement

Customer Question

Where do I report the adjusted basis of a replacement property when selling an asset that was acquired in a 1031 exchange?
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

I'm not sure I understand your question.

Was the replacement property being depreciated?

What type of property are you talking about?

Rental real estate or ?

You are probably dealing with a sale that gets reported on Form 4797, but please clarify what you are asking about.

Customer: replied 1 year ago.
1. The property should have been depreciated in each of the ten years since the 1031 exchange occurred. I did not in fact do so. I understand that I must decrease the basis by the amount of depreciation I SHOULD have taken.
2. This 1031 was for like-kind commercial real estate.
3. I have been working on the 4797 for some time and am leading towards replacing the cost of the replacement property (building and land with depreciation added back in for the latter) that appears in column f ($1,154,559) with the adjusted basis of the replacement property as calculated at the time of the exchange in 2006 ($646,494). But I don't think that is correct...
Expert:  Stephen G. replied 1 year ago.

OK, well you are way ahead of the game.

You realize, I'm sure, that you can amend the last 3 years tax returns to claim the depreciation you failed to take?

The adjusted basis of the replacement property is what should have been depreciated as you probably know.

However, I would suggest at this point that in order to mitigate the impact of not claiming depreciation on the building for the ten years, that you take a somewhat aggressive approach to the allocation of the land & building of the adjusted basis of the property as of it's acquisition date.

We can discuss that further if you wish.

Steve G.

Expert:  Stephen G. replied 1 year ago.

By the way, was there some reason why you didn't claim the depreciation on the property?

Customer: replied 1 year ago.
I thought about that and don't really want to re-file for the past three years as there were other large transactions in some of those years in which I took some aggressive positions. No need to draw attention by re-filing. I do like your idea allocating more than the 17.5% to the land although that was the percentage specified at the time of the exchange in 2006 by the TIC promoter. Since I took no depreciation why would they question it, right?
I'm attaching the original 8824 for your reference. Please note that it was a multi-property exchange and the one that sold last year is the mall. It's percentage of the FMV is 33.8% so that is what I am applying to line 25 to come up with the adjusted basis of $646,494.
What I find strange is that it is not clear that column f is the place to change the sales price plus depreciation as calculated in columns d and e. (4797 also attached)......
Expert:  Stephen G. replied 1 year ago.

TIC Promoter?

Customer: replied 1 year ago.
1031 exchanges that were very popular in the go-go days of 2002-2007. Promoters identified larger asset properties and arranged for them to be bought by up to 35 tenant in common investors using the 1031 mechanism. An IRS revenue ruling declared this to be fine as long as certain criteria were met including no active involvement.
Customer: replied 1 year ago.
Correction: the one that sold last year was the Atlanta hotels.
Expert:  Stephen G. replied 1 year ago.

Did you depreciate the other properties?

Re: 4797 When you correct the starting basis to 646,494 & allocate the land the transaction will change to a gain & be reported on Part III?

I don't see the total of 646,494. - Is that the ending basis you are referring to?

What is the Correct beginning basis of the property sold ie. the Hotel?

Customer: replied 1 year ago.
The mall, yes. The SFR no.
Correct, there will be a taxable gain.
The 646,494 is the 33.8% of line 25 (basis of like kind property received) attributable to Moody Atlanta.
Expert:  Stephen G. replied 1 year ago.

So, now when you switch to Part III, do you still have a question about where the figures flow?

Customer: replied 1 year ago.
It seems not. Turbotax wants to fill it in from the disposition worksheet for Schedule E and it's not obvious where to change the basis on that form. So I will do it on 4797 part III.
So the remaining questions at this moment are, when allocating the percentage higher to land, does it matter that the depreciation report shows the original allocation of 82.5/17.5 from 2006?
Does it fall under 1245,50,52,54 or 55? and/or is it not subject to net income tax?
Expert:  Stephen G. replied 1 year ago.

What depreciation report?

I thought you didn't depreciate the property?

Generally it is Section 1250 property, depreciable real property

I haven't reviewed those other sections

"not subject to net income tax"? What do you mean or is that an attempt at humor?

Customer: replied 1 year ago.
I didn't depreciate it, but TTax creates a depreciation report when you dispose of the property and calculates the percentage of building/land as indicated when it was purchased.
I can be funny, but not this time :) that option is available if you don't choose one of the 12xx types.
Expert:  Stephen G. replied 1 year ago.

From 10 years ago?

That input has to come from somewhere;

I'm obviously missing something here. If that's in TurboTax, the depreciation would have been taken. So is it basing that on something you entered related to the sale?

Customer: replied 1 year ago.
I guess it is. So I will try and see how and if I can adjust it. So the final thought is about whether I have to treat this sale as a pro-rated portion of the initial transaction or can I choose to reduce the total basis of the replacement properties by the amount of this transaction, leaving the remainder for a future sale of one of the two remaining properties? Obviously there would likely be more tax due in the future but that sale or sales may not happen for many years.....
Expert:  Stephen G. replied 1 year ago.

My thought was simply a way to reduce the lost depreciation.

I don't know how you would be able to reduce the basis of the replacement properties now;

You have to be able to justify how you are doing the allocation which should have been determined at the time of the transaction and was the basis of depreciation. If you've depreciated everything except this property, you are locked in to that basis.

I don't know how you could go back and re-allocate that now; I don't think that would be acceptable and would definitely put you at risk for the tax and there would definitely be penalties & interest involved.

Please remember to rate my response as that is the only way we receive credit for our work.

Thanks for using

Steve G.