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How do I calculate 1250 recapture when a 1031 exchange property is sold?

david3
Level 5

TP sold a 1031 exchange property. The exchange was done in 2016 and I looked at the details on F8824 for that year.

It appears that the accumulated depreciation on the relinquished property was not carried over to the replacement asset. All the instructions appear to have been followed in reported the exchange.

The FMV of property given up was $480K and the FMV of property received was $445K. Boot of $35K was reduced by selling costs of $30K resulting in a taxable gain of $5K.

The adjusted basis of the property given up was $246K and accumulated depreciation taken was $66K.

Deferred gain is $199K.

The asset entry for the replacement property reports the $246K adjusted basis and depreciation was calculated on this amount. The election to elect out of regs under Sec 1.168(i)-6(i) was not taken.

When the accumulated depreciation from the relinquished asset was entered on the replacement property Asset Entry Wks, an error message stated that no prior depreciation should be entered for the asset. Now this seems to come back to bite me when reporting the sale of the property.

$32K depreciation has been taken on the replacement asset since the 2016 exchange date. The gain from sale only reports $32K as 1250 recapture and ignores the $66K depreciation reported for the relinquished property. 

Shouldn't the 1250 recapture be $32K plus $66K for a total recapture amount of $98K?

How do I get PS to recognize the total amount of $98K 1250 recapture? 

For future 1031s, how can the prior depreciation on relinquished property be accounted for in PS so that it isn't dropped in calculating 1250 recapture?

Thank you. 

 

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TaxGuyBill
Level 14

Okay, but you still should have been using the original depreciation asset, right?   Using the original "placed in service" date and the original prior depreciation.  Then it should have just been continuing to depreciate the old asset, and it should be able to be reported as usual.

If that is not how you have it set up, what have you been doing for depreciating?

 

But as I said before, I think that original $5000 should have been taxed as Unrecaptured Section 1250 Gain.  And I think the only way to manipulate things to factor that in is to manually do things on the "Enterable 4797".

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6 Replies 6
TaxGuyBill
Level 14

I'm too tired today to analyze everything you said, but I'll toss out a few thoughts and questions:

 


@david3 wrote:

The election to elect out of regs under Sec 1.168(i)-6(i) was not taken.

When the accumulated depreciation from the relinquished asset was entered on the replacement property Asset Entry Wks, an error message stated that no prior depreciation should be entered for the asset.


 

If the election out was not taken, you should be depreciating it on two separate Asset Entry Worksheets, right?  One for the depreciation of the 'old' building and one for the additional cost for the 'new' building.   The 'old' building should still have the original "placed in service" date with the prior depreciation.

If that is the case, you can just allocate the sales price between the two Asset Entry Worksheets.

Otherwise, for any situation that entering the sale on the sale on the Asset Entry Worksheets is problematic, you can just enter the sale DATE on the worksheet and leave the sales price BLANK.  That will stop the depreciation.  Then use the "Enterable 4797" to manually enter the sales information.

 

 


@david3 wrote:

Boot of $35K was reduced by selling costs of $30K resulting in a taxable gain of $5K.

Shouldn't the 1250 recapture be $32K plus $66K for a total recapture amount of $98K?


 

I didn't look at all of your numbers, but did you factor in the $5000 that was already taxed?  You don't want to tax that again.  I think the $5000 of taxable boot should have been taxed as Unrecaptured Section 1250 Gain, so that will reduce that amount of gain subject to Unrecaptured Section 1250 Gain.

 

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david3
Level 5

Thanks for helping even though you're tired. 🙂

There is no excess basis for the new asset since the FMV of the old property was greater than the FMV of the new property. Therefore, the adjusted basis of the old property was used as the basis of the new property.

Now that I'm reporting the sale of the property I noticed that the $66K accumulated depreciation on the relinquished property has been dropped from the history for the asset. 

I think the problem is because the FMV of the new property was lower than the FMV of the relinquished property. I followed the PS directions and it appears that PS doesn't have a method to handle this situation - unless I missed that.

I guess I'll have to do a work around as you suggest to add the depreciation for the relinquished property to the depreciation on the new property when calculating sec 1250 recapture.

It would be helpful if anyone has a suggestion on how to enter an exchange in PS for this type of situation so that all depreciation is considered in the 1250 recapture amount.

Thanks for your help.

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TaxGuyBill
Level 14

Okay, but you still should have been using the original depreciation asset, right?   Using the original "placed in service" date and the original prior depreciation.  Then it should have just been continuing to depreciate the old asset, and it should be able to be reported as usual.

If that is not how you have it set up, what have you been doing for depreciating?

 

But as I said before, I think that original $5000 should have been taxed as Unrecaptured Section 1250 Gain.  And I think the only way to manipulate things to factor that in is to manually do things on the "Enterable 4797".

View solution in original post

david3
Level 5

I think that's where I messed up. I treated the $246K adjusted basis of the relinquished property as the depreciable value of the new asset and started the depreciation period from the 1031 exchange date.

There should not have been a value for the new asset.

You're correct - I'll have to manually record the sale on the "Enterable 4797".

Thanks so much for clarifying this. 

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TaxGuyBill
Level 14

I totally understand.  It always takes me quite a while to wrap my head around for how to deal with a 1031 exchange.

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david3
Level 5

Also, I want to make sure I'm not calculating too much to 1250 recapture and PS knows something I don't. 🙂

But it seems as though the 1250 recapture should also include depreciation taken in the past for the relinquished property.

Thanks.

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