Help with 1031 property sale

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Loon11
Posts: 221
Joined: Wed Feb 29, 2012 6:07 pm

Help with 1031 property sale

Post by Loon11 » Wed Nov 07, 2018 9:55 pm

Hello Bogleheads. I am turning to you for help with this rather than trying to hire someone who I won't trust. Involves selling a real estate lot which was purchased about 12-13 years ago (in 2006 at the height of the market). Here are the details: I sold a rental property which had approx 150K gain.
I did a 1031 and purchased 2 lots to defer the gain - one cost $109K and one cost > 50K.
the lot that cost $109K has a pending offer to buy. (came from a letter). I would love to get rid of it but not sure what the tax consequences will be. The proportion of the gain that the lot represents is about 70% (had to split the $150 gain into two properties)
I think I will need to pay back 70% of the depreciation taken on the initial rental property, right? the initial property was purchased in 1988 and sold in 2006. Depreciation of $1945 was taken annually for 17 years totalling about $33K.
I believe that amount (or 70%=23K) will be taxed at 25%. Which is going to be around $6K in federal tax (plus state somewhere in there)if my assumptions are correct.
After depreciation taken is taxed , what will be taxed next? I paid $110K for the property which is not going to bring more than $75 or $80K. will
I have to pay tax on the full amount of the $110K or whatever it sells for now? I also need to worry how this affects my tax rate and medicare premiums.

I believe the best thing for us to do is not sell - the annual tax on the lot is $300. Leave it to our son - he can sell it then. I regret doing the 1031 and wish we had paid tax at the time of sale and been done with it! appreciate anyone's comments who may have experienced anything similar.

StopIroningShirts
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Re: Help with 1031 property sale

Post by StopIroningShirts » Mon Nov 12, 2018 6:37 am

There's a lot going on in this post - Can I ask this question? What is your cost basis in the lot?

This is the total cash you paid for the original property plus anything else you put down to purchase the two lots.

I'm also confused on what you took depreciation on. The IRS only allows you to depreciate structures and not land.

riverguy
Posts: 439
Joined: Sun May 23, 2010 10:33 pm

Re: Help with 1031 property sale

Post by riverguy » Mon Nov 12, 2018 9:36 am

If you exchange a developed property for undeveloped, you cannot defer the depreciation. You should have paid the depreciation recapture when the developed property was exchanged for undeveloped.

Loon11
Posts: 221
Joined: Wed Feb 29, 2012 6:07 pm

Re: Help with 1031 property sale

Post by Loon11 » Mon Nov 12, 2018 9:09 pm

Thanks. There were two undeveloped lots with a total cost of $195K. I did an 8824 at the time (original house basis was 57500-27500 for land, plus 30000 depreciation, there were some other closing costs, etc which took the basis up to $64K. Purchased 2 lots (one for $110K and one for $85K) and used an intermediary company to do it all - Land America.

but now the lots aren't worth much - the one for $110 probably wont' bring more than $80 and the other one even less. I know we need to repay the depreciation at 25% but I'm unclear on if a sale of one should be proportional to "divy up" the taxes, ie. the $110K paying 70 percent of the depreciation tax.

All in all, we have decided to leave it alone and just pay the RE taxes every year. We regret not just selling the rental back in 2006 but looks like we are stuck with both lots - the extra income will throw us into IRMA if not worse.

Thanks for your thoughts

riverguy
Posts: 439
Joined: Sun May 23, 2010 10:33 pm

Re: Help with 1031 property sale

Post by riverguy » Tue Nov 13, 2018 10:11 am

56% (110/195) of your basis would be attributable to the $110k property. And the remainder of the basis goes to the other one. There’s really no splitting up the depreciation as you should have paid that in 2006 when you exchanged developed for undeveloped real property.

So it seems like your basis will be $64k x 56% = 35.8k. Sell for 80k so you have a cap gain of 44k on that lot.

Loon11
Posts: 221
Joined: Wed Feb 29, 2012 6:07 pm

Re: Help with 1031 property sale

Post by Loon11 » Tue Nov 13, 2018 9:03 pm

Thanks Riverguy1

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