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BobD
Returning Member

Acquired vacant land in a 1031 exchange 3 years ago. Had both depreciation recapture and capital gains deferred. Want to sell a small part of the land, for less than the deferred depreciation recapture. Would the proceeds be proportioned or all applied to depreciation recapture?

 
3 Replies
Carl
Level 15

Acquired vacant land in a 1031 exchange 3 years ago. Had both depreciation recapture and capital gains deferred. Want to sell a small part of the land, for less than the deferred depreciation recapture. Would the proceeds be proportioned or all applied to depreciation recapture?

If this is vacant land, then what depreciation? Land is never a depreciable asset. Maybe this was timber land that upon selling timber you took depletion?

BobD
Returning Member

Acquired vacant land in a 1031 exchange 3 years ago. Had both depreciation recapture and capital gains deferred. Want to sell a small part of the land, for less than the deferred depreciation recapture. Would the proceeds be proportioned or all applied to depreciation recapture?

The vacant land was acquired in a 1031 exchange in 2016 from a rental house I had for years and was fully depreciated.   So both depreciation recapture and capital gains were deferred.  I want to subdivide and sell 1 acre of the 9 acres.  My Question is: 

Will I owe taxes proportion to the amounts deferred?  That is, part of the proceeds would be owed as the deferred depreciation recapture, part deferred capital gains and the balance return of capital (no tax).  The amounts taxable being determined as the percent of the deferred depreciation to the purchase price, the deferred capital gains as a percent of the purchase price and the tax basis as a percent of purchase price. 

Or would all of the proceeds from the sale of the 1 acre go towards depreciation recapture until the full deferred amount was reached and then any additional amount applied to deferred capital gains until that full amount is reached, etc.  Or something different?

Carl
Level 15

Acquired vacant land in a 1031 exchange 3 years ago. Had both depreciation recapture and capital gains deferred. Want to sell a small part of the land, for less than the deferred depreciation recapture. Would the proceeds be proportioned or all applied to depreciation recapture?

Basically, what you have to do is reduce your cost-basis in the land by the amount of depreciation deferred, when you sell that land. So if your cost basis in the rental was $100,000 and you had $30,000 of unrecaptured depreciation, that makes your cost basis in the land $70,000. If devising the land into 9 equal parcels, $70K divided by 9 means your cost basis on each parcel is $7777.78. Since the IRS rounds to the nearest dollar, your cost basis for each parcel would be $7778.

Now I'm not all that familiar with 1030 exchanges. But for what *extremely* little I know and *somewhat* understand about the process (I think), that cost basis reduction should have been done at the time of the exchange. I don't know if it was required to be done, or if it was an option to let the person you exchanged with, keep that deprecation. But since 1031 exchanges are required to be handled by a disinterested 3rd party, that 3rd party would be much more knowledgeable on this than I am, by far.

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