OLD TAX BASIS IS CARRIED OVER IN A 1031 EXCHANGE
TAX BASIS – PURCHASE ACQUISITION
In a standard purchase transaction, the taxpayer’s original tax basis in the purchase property is the actual purchase price. The taxpayer allocates a portion of this purchase to land value and the remaining amount to real and/or personal property that is eligible for annual cost recovery (depreciation) deductions.
TAX BASIS – EXCHANGE ACQUISITION
In an IRC Section 1031 tax deferred exchange, the tax basis in the replacement property is reduced using a formula that takes into account the adjusted basis of the relinquished property sold in the exchange. Treas. Reg. §1.1031(d)-1(e) says that the basis of the replacement property acquired must be increased (or decreased) by the amount of the gain (or loss) recognized on the transfer of the relinquished property. Although most taxpayers will rely upon the calculations provided by their tax and/or legal advisors, the formula for determining the tax basis in the replacement property is reflected in this handout.
REPLACEMENT PROPERTY BASIS FORMULA
|1.||Relinquished Property Adjusted Basis||____________|
|2.||Plus: Any other Property Transferred||+||____________|
|3.||Plus: Liabilities Assumed by Taxpayer||+||____________|
|4.||Plus: Amount of Cash Paid by Taxpayer||+||____________|
|5.||Plus: Gain Recognized on other Property||+||____________|
|6.||Less: Money or Property Received||–||____________|
|7.||Less: Liabilities assumed by other Party||–||____________|
|8.||Less: Loss Recognized on other Property||–||____________|
|9.||Equals: Basis in Replacement Property||=||____________|
Taxpayer exchanges a relinquished property with a value of $1,000,000, mortgage of $500,000 and a basis of $500,000 for a replacement property with a value of $1,500,000, mortgage of $900,000 and the taxpayer adds $100,000 cash. Basis is computed as follows:
|Basis of Relinquished Property||$500,000|
|Plus: Liabilities Assumed by Taxpayer||+||$900,000|
|Plus: Amount of Cash Paid||+||$100,000|
|Less: Liabilities Assumed by Buyer||–||$500,000|
|Equals: Basis in Replacement Property||=||$1,000,000|
A SIMPLE RULE
An easy rule to remember is that the taxpayer’s basis in the replacement property is the value of the replacement property less the amount of gain deferred in the exchange (or plus the amount of unrecognized loss).