Hello Vic_R. After doing some more research on the internet, and working through some examples on the internet, this is how it seems to work. Hope this helps.
The new adjusted basis number on line 25 is the "cost" of the received property to determine the capital gain if you sell the received property. Regarding depreciation:
A. Carry forward the depreciation of the relinquished property as if the relinquished property had not been sold.
B. To determine the "excess basis" of the received property to depreciate: 1) First calculate what percentage the building is of the total basis of the received property, which I took to mean the building value divided by the total of purchase price of the received property plus any exchange expenses. ; 2) Then take this percentage and multiply it by the amount of Line 25 on form 8824, the new adjusted basis of the received property. This backs out un-depreciable assets included in the new adjusted basis such as land ; 3) Depreciate the building over 27.5 years as you normally would.
See: https://tax-lawyer-texas.com/2018/05/28/calculation-of-basis-in-new-property-in-a-section-1031-like-... and the example below which do not know the web address of:
Example: An exchanger has been taking depreciation for 10 years on a residential rental purchased for $150,000. He has taken $4,500 in depreciation annually leaving an exchanged basis of $105,000. If he purchases a residential replacement property with a total new basis of $165,000 (per Line 25 of IRS Form 8824), his depreciation schedules for the replacement property would be as follows:
A. Continuation of the Old Schedule for remaining 17.5 years : $4,500 per year for 17.5 years.
B. New Schedule for amount of Excess Basis for 27.5 years: If the value of the new property depreciab'le improvements were 82.5%, then the $60,000 increase in basis ($165,000 -105,000) would be depreciated as follows: $60,000 X 82.5% = $49,500 divided by 27.5 years. The result would be $1,800 in annual depreciation to be taken for 27.5 years.
The total depreciation to be taken annually henceforth would be $4,500 (old schedule) plus $1,800 (new schedule) for a total amount of $6,300.
