The '2 schedule' approach is fine, however the confusion begins because there is no negative value based on the overall 1031 exchange.
As noted last year, the information was provided when it was not yet clear with respect to receiving only one building in the trade for three properties when only one building (convenience store) was actually received. See a portion of last year's notes:
- 'Part 2: All fees with the exception of marketing would be added to the cost basis as part of the buy up charges. Add those fees to the assets mentioned above before apportioning it.'
- You did not acquire another building: 'When you enter the new properties (Add another property for each building), you will select as noted above and they will be depreciated using the correct 39 year recovery.'
- NOTE: **** Although the actual trade did include mineral property, the land must be a factor that must be used in the formula to arrive at the correct amount for purchase of the mineral property regardless of the fact it cannot be depreciated or be called land.
- This will actually reduce the land value associated with the convenience store as it should. There is no negative amount in the exchange.
The added up-charge we originally calculated of $118,000 which requires a portion assigned to the mineral properties. This, as you noted, is not depreciable so it stays on-hold until you trade or sell the mineral properties. It doesn't have to be the entire amount that is assigned to the mineral properties, however the formula must work out in a positive result. You did NOT have a section 1031 trade that resulted in a loss.
If you believe the full land value should remain with the new convenience store, then you would simply leave the original building in tact as it was and continue to depreciate it even if you enter it again to rename it. Keep in mind this retains the same character as if it was never traded. The purpose is to defer any gain until you fully dispose of the replacement property.
- As stated earlier, then the $118,000 would be split between the two mineral properties and suspended until sold.
@jamie-m-todd
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