Rental Property Sale, Un-depreciated proprerty and Like-Kind Exchange questions

[robert-a]

A rental property was sold - ex: $300,000. Seller took a down payment and holds the mortgage. A (1031) like-kind transaction used the down payment ex. $50,000, plus the seller added cash $30,000, to purchase a rental property, using a Qualified Intermediary (fee $1,250).

Where in the program is the allowable depreciation that had not yet been taken by the seller upon the sale of the rental property go? ( The AMT Report below the indexed Schedule E shows the 'Depreciation Basis' not taken prior to sale. ex: $7,000.)

The seller took back a mortgage ex: $250,000. Which forms are needed for this transaction? Although I have been with ProSeries Professional since 1994 tax year, I have not had this situation to input into the tax program. Thank you very much for your help.

Respectfully, Robert

[sjrcpa]

Sounds like you have a failed 1031 exchange ( you have to replace with equal or higher value) and are left with an installment sale -Form 6252.

Are you saying client never claimed depreciation? Or not on this year's return yet?

[robert-a]

Seller of Property ‘A’ received a down payment of $500,000 – after expenses of the sale, the Intermediary received approximately $267,250. After their fee of $1,250 - $266,000 was given to the seller of Property ‘B’ at the closing for the rental property identified and purchased by the seller of ‘A’.

Seller A purchased the property ‘B’ for $356,000. At the closing, seller ‘A’ added $90,000.00 in cash to make the purchase. Are you saying that the property purchased for $356,000.00 which is more than the $267,000.00 left after expenses of the sale e.g. transfer taxes, etc., is a failed 1031 exchange because the $356K does not exceed the gross down payment of $550K?

Client no longer had depreciation on the building Property ‘A’, but only the remainder of depreciation for appliances and apt renovations that had not as yet completed their term of depreciation allowed sjrcpa. No depreciation was yet taken on this year’s return. The AMT report in the program shows depreciation remaining that has not been taken.

Thank you for your response and help sjrcpa. Your knowledge and experience are a blessing.

Robert

[sjrcpa]

I thought you were saying the new property only cost $80K.

[sjrcpa]

Up until date of sale, depreciation of old property goes on the Sch E for the old property.

Since you can't use a 1031 exchange for personal property (appliances) I think there is no more depreciation for that after the date of the sale of the old property. If the improvements were real property you would continue their depreciation on the new property rental schedule.

You have to calculate basis in the new rental property, taking into account the old basis and the new land/building split. Then you get some new depreciation.

[qbteachmt]

"Are you saying that the property purchased for $356,000.00 which is more than the $267,000.00 left after expenses of the sale e.g. transfer taxes, etc., is a failed 1031 exchange because the $356K does not exceed the gross down payment of $550K?"

I'm getting lost between what was stated as Funds and what was stated as Price, for the sale of Property A. Sorry. Person A selling property A is carrying the mortgage and did not get paid in full for the sale, so that money did not go through the exchange? Isn't that the same as if they kept the principal out of the sale of property A?

[robert-a]

I apologize sjrcpa. This first posting of a situation that confounded me caused me to initially use low figures as 'an example' that I thought would convey the questions I can't answer in how to input the transaction into the program. The client sold the property for 4mil, took down 500K and holds a mtge for 3.5mil. So..after your initial response 'sounds like you have a failed 1031 exchange', I then posted the facts regarding the down payment (500K) and the remainder 266K after fees, as being the amount to use in a 1031 exchange to buy the new rental property which cost 356K. I thank you for your perseverance and assistance to bring me clarity. 

Sincerely, Robert

[qbteachmt]

"The client sold the property for 4mil, took down 500K and holds a mtge for 3.5mil."

"as being the amount to use in a 1031 exchange to buy the new rental property which cost 356K"

It seems you understand that 1031 is a type of Banking. But it's supposed to be deferral of tax on gain by the use of the gain to invest it. Your taxpayer is getting the money (violating 1031) by assuming the debt. Carrying the note means there is principal payment portion to your taxpayer. That's why sjrcpa mentioned failed exchange. You also have to know what the gain was on the sale; not just the sale price. The downpayment is not part of the exchange math; again, it's part of banking (how funds are moving). The Exchange is going to use Values and Amounts, not characterization that some amount is considered a downpayment, because a downpayment is part of Payment, just paid early, and against the purchase.

What is supposed to happen for exchange, is that your taxpayer doesn't get to access the funds. By taking back the note for that mortgage, that explains some amount of their sale is not under control of the intermediary and is in fact going to the taxpayer to do with what they want. That makes it outside of the exchange.

You might have a partial exchange or a failed exchange, now that we see some more specific details that apply.

[robert-a]

Dear qbteachmt,

            You advised: Your taxpayer is getting the money (violating 1031) by assuming the debt. Carrying the note means there is principal payment portion to your taxpayer. That's why sjrcpa mentioned failed exchange. You also have to know what the gain was on the sale; not just the sale price.

            The client has as a remaining un-depreciated basis of $4,391. The sale was for $4mil. After expenses of the sale, the gain is $3,788,941. Then the Intermediary fee was $1,250.

            How do I now report this? Notify my client that the property purchased does not qualify as a 1031 Exchange for rental property and that the entire gain of $3,788,941 needs to be reported? May I subtract as expense of the sale also the intermediary fee was $1,250? What forms do I use to report the sale now, and the mortgage of $3.5mil on, just the Form 6252? What else do I need to do as it is a failed exchange by violation? I sincerely appreciate the answers to help me in what has been a quagmire for me. I have attempted to read and get answers but so far have not. I am very thankful for “companions for the journey”. God is good! Always                                                      robert-a

[qbteachmt]

Their gain is over $3m, but you stated: "I then posted the facts regarding the down payment (500K) and the remainder 266K after fees, as being the amount to use in a 1031 exchange to buy the new rental property which cost 356K"

And the math doesn't work here, either.

I would find a local advisor to help. They can work through the details, and perhaps find some sort of deferral in this mess. The internet is not the best resource for working through details that affect each other.

[robert-a]

Thank you