I completed a 1031 Exchange in 2023 in which the relinquished property was replaced by 3 replacement properties. One of the replacement properties is a convenience store/fuel center. The other two properties are really mineral rights which generate royalty payments - in which there is no physical land.
Please note, I am using the "2 schedule" method, which addresses each property separately versus combining all 3 - from a tax filing perspective.
From speaking with other Turbo Tax experts I believe the following is true:
- Royalty Properties, as in the case of oil and gas mineral rights, cannot be allocated any land tied to the relinquished property’s original basis or any replacement property’s additional basis.
- I’m interpreting that into 100% of the land value tied to both basis numbers gets assigned to the convenience store. Is that correct?
- While you cannot depreciate a basis amount assigned to a Royalty Property, you must assign a reasonable value to it as it was also a property received in the trade. It can be used when and if I sell those rights to reduce any gain in the future. Is this correct?
- Seeing the 2 Royalty Properties represent 74% of the total replacement value, I’ve assigned 74% of the original and additional basis values to these 2 properties. Once assigned, that 74% will remain untouched until the mineral rights are sold.
- The remaining 26% of the basis numbers have been assigned to the convenience store.
The negative basis number assigned to the convenience store is just a matter of subtracting 100% of the land from only 26% of the remaining basis that has yet to be depreciated.
Here are how the numbers played out between the relinquished property and the convenience store replacement property.
Relinquished Property:
- $320k cost
- $64k land value
- $166k prior depreciation
- $89k remaining basis
Convenience Store Replacement Property:
- $84k apportioned cost
- $64k apportioned land value
- $44k apportioned prior depreciation
- Calculation = $ Apportioned Remaining Depreciable Basis = (Apportioned Cost minus (Apportioned Land Value from Relinquished Prop + Apportioned Prior Depreciation from Relinquished Prop)
- $84k – ($64k + $44k) = -24k
To note, the additional basis coming from the convenience store (which has a structure that can be depreciated), after factoring in the relinquished property's loan/debt, AND after being allocated across all 3 properties, is not enough to offset the negative basis coming from the Relinquished property to the convenience store replacement property.
MAIN QUESTION:
What do I do when it is a negative basis value? Do I enter the -24k, or the value $0? How is this usually handled?
Any guidance here will be greatly appreciated!
Thanks!
As a reference, TurboTax experts that assisted me last year, just in case they can address this question
@DianeW777
@AmyC
