Question

TP acquired a tract of land by way of gift from his parents. His parents purchased the land in 1980 for $100,000, and gifted it to him in 2010 when it had a fair market value of $500,000. In 2012, TP built a 5 unit apartment building on the land at a cost of $500,000. Accumulated depreciation to date totals $40,000. TP has an agreement to sell the real estate for an adjusted sales price of $1,500,000. He intends to acquire like-kind replacement property in a section 1031 exchange. The purchase price of this target property will be $2,000,000. Assuming all the statutory requirements of section 1031 are met, please compute realized and recognized gain (if any) on the sale of the relinquished property, and the basis of the newly acquired target property, assuming that he goes forward with the purchase of this target property in a section 1031 like kind exchange.

Answer 1

Answers

I.Computation of realized and recognized gain (if any) on the sale of the relinquished property

Amount realized;
FMV of like-kind Property received	$2,00,000
Cash proceeds from Sale of land	$1,50,000
Amount realized by TP		$3,50,000
Adjusted basis;
Basis of Inherited Land (See Notes)	$1,00,000
Add; Improvements in the Inherited land	$5,00,000
Total	$6,00,000
Less: Depreciation of Inherited land	$40,000
Adjusted basis		$5,60,000
Realized Loss by TP on exchange		$(2,10,000)

Explanation: Here, we got a “Realised Loss” of $(210,000) on the sale of relinquished property, since ‘Adjusted Basis’ is more than the ‘Amount realized on sale’.

“Recognized gain or loss” means the amount of “Realized Gain/Loss “which is taken for Tax purposes. In this case, this Exchange is coming under “Non- Taxable Exchanges” under Internal Revenue Service. “Non- Taxable Exchanges” is the type of exchange of property for the same kind/like kind of property.

Therefore, TP has “No or $0 Recognised Gain/Loss”, since, it is mentioned that “He intends to acquire like-kind replacement property in a section 1031 exchange”.

Notes: Basis of Inherited land is $1,00,000, because FMV of Inherited property is $5,00,000 which greater than the Parents’ Basis of land of $1,00,000. In this scenario, we should consider Parents Basis of land of $1,00,000 as “TP ‘s Basis of Inherited Land”

II.Computation of basis of the newly acquired target property

Basis of the newly acquired target property is $ 5,60,000, which is calculated as follows;

Basis of Inherited Land (See above Notes)	$1,00,000
Add; Improvements in the Inherited land	$5,00,000
Total	$6,00,000
Less: Depreciation of Inherited land	$40,000
Basis of Newly Acquired property		$5,60,000