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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 585
Experience:  10 years experience
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Need to determine whether to record 1031 exchange on the

Customer Question

Need to determine whether to record 1031 exchange on the books using tax basis or GAAP basis. In this instance an existing partnership sold real estate (4 million) and then created a new LLC to purchase the new property for 8 million. Should I record the new property as 8 million (depreciating a much smaller tax basis) and using a 'capital account' on a GAAP basis? If so, on the existing partnershi, I'll need to report an "investment in LLC" which will require a large M-1 to report the gain not recognized from the 1031 exchange.
JA: The Accountant will know how to help. Is there anything else important you think the Accountant should know?
Customer: NO
Submitted: 10 months ago.
Category: Tax
Expert:  Mark Taylor replied 10 months ago.

Hi, my name is Mark. I will be happy to help you with your questions.

Customer: replied 10 months ago.
Should I wait for an answer by email?
Expert:  Mark Taylor replied 10 months ago.

Sorry give me a few moments I am working on your response right now.

Expert:  Mark Taylor replied 10 months ago.

Who are the members of the LLC? What state is the taxpayer in?

Customer: replied 10 months ago.
3 individuals (CA residents) own a general partnership owning CA commercial bldg. Created new LLC owned by existing partnership to purchase new property (in Texas)
Customer: replied 10 months ago.
Therefore I am booking an "investment in LLC" account on the existing partnership and record a "Capital contribution" on the new LLC. Should I use GAAP or tax basis to record the exchange on the books? If I record the actual cost of the new building on the books of the new LLC, that will require me to report a large M-1 on Form 1065 for the existing partnership.
Customer: replied 10 months ago.
Is using M-1 the proper method to report the unrecognized gain from a 1031 exchange?
Expert:  Mark Taylor replied 10 months ago.

You could use either method. If you record the property at 8 million (as you mentioned) you would not be able to use the full amount for depreciation purposes. Yes, you would need to make a M-1 adjustment for the deferred gain. No matter what method you select the tax treatment when the new property is sold would have the same net result.