Basis and how to split it from 1031 Exchange

[ScottTS]

I sold a land parcel for $233k that had a basis of $53167.46.  I bought 2 land parcels and a parcel with a house for a total price of $552500. I calculated the allowable "exchange expenses" at $15553.11.

TurboTax Form 8824 says I has a realized gain of 164280 and line 25 shows a new basis of $388220.  Take 233k - basis + expense to get the gain (ignoring the pennies) and that is what I got, but the new basis number makes no sense to me. The mortgage I took on that house was for $337836.32, so that plus the transferred basis is $391003.80 which is higher before taking any expenses into consideration.

So going forward do I use my calculations for basis or must I start with Form 8824 Line 25?

Then how would I split the basis (whatever it is) over the 3 properties? Split  the basis so there is gain on each property, or can I make the land only ones all basis and the gain go entirely on the house? Another thought, the properties all abut and were once a single parcel can I treat it all a a single "land" plus house? Once I have the split I know to use the property tax split of 10/90 to separate land from house.

I have a bunch of expenses to find the identified exchange properties, do home inspection and other closing costs before even beginning to make the house rentable, repair and furnish, which I'm required to do.

Would these all be added to the depreciable basis for the house added to Schedule E?

Can I even just add all the costs up to the house being ready to rent to use as the house "cost" and depreciable basis?

[tagteam]

---

@ScottTS wrote:

I sold a land parcel for $233k that had a basis of $53167.46.  I bought 2 land parcels and a parcel with a house for a total price of $552500. I calculated the allowable "exchange expenses" at $15553.11.

TurboTax Form 8824 says I has a realized gain of 164280....

---

I cannot be certain, but I suspect something went wrong with how you entered the transaction.

Just using round numbers for the fair market value and basis of the vacant land you relinquished and the exchange expenses you posted results in almost the exact amount of realized gain (i.e., $233k - $16k - $53k = $164k). So, it is almost as if the exchange was never reported (or reported incorrectly).

You might want to go back through the like-kind exchange section and verify that you entered the figures correctly. 

For one thing, the mortgage you took on the replacement property should not factor into your exchange calculation.

[RobertB4444]

@krupacreative is right - that gain is what would be showing if you did no exchange.  So you should go back in and check those entries.

You can also add up all of the costs that you have for closing on the properties and then renovating and repairing prior to the property being available for rent.  Once it is on the market you can either add all those costs to the basis or create a separate asset (call it 'set-up costs' or 'start-up costs' or something) and depreciate that asset separately over the same 27.5 year period.

So, your basis on the properties, which can be spread out over the three however is best for you to manage using that 90/10 rule, should be the basis on the property you exchanged, plus the gain on the new property plus the costs to renovate and set up the property.

@ScottTS 

[ScottTS]

@tagteam The mortgage isn't asked for on form 8824 but it IS the cash I added so the numbers should reflect it.

In TT on Form 8824 it has little worksheets between the actual form lines.

Summary Worksheet:

A is FMV of property received = 552500 entered

G is FMV of given up = 233000 entered

M is "cash given" = 319500 calculated by simple subtraction and should be my mortgage (~338k) less all closing costs.

O is basis of property given up = 53167 entered

Line 15 Worksheet:

F flowed from M above, H is same value via calculation
K is exchange expenses = 15553 entered (not all closing costs are allowable)

Line 16 & 17 are the first form fields with a value and is the FMV recv = 552500 calculated

Line 18 Worksheet, everything just flows or calculates above #s. It just sums up the 53167 basis + 15553 exch exp + 319500 cash given = 388220 calculated which ends up in line 18.

Line 19 is the FMV 552500 - Line 18 = 164280 calculated realized gain.

Line 24 same as Line 19 = 164280

Line 25 same as Line 18 = 388220

So, all the numbers check out as entered and mathematically on the form.

My problem is that

53167 given basis + 337837 mortgage + ~200 cash at closing = 391200

is ~3k higher. Maybe that is the closing costs not allowable on this form ... guess I forgot the closing costs were already covered by the mortgage, ergo I this form is correct.

So I assume that means the answer to my first question in OP is I use the Line 25 number as my starting basis.

@RobertB4444 I entered the major furniture purchases on the assets so they are being depreciated. So all those other expenses of acquisition and getting ready to rent don't get entered anywhere in TT now, they just add to my basis waiting for a future time when I sell the property? I.e they aren't factored into the basis for the house at all.

So calculating the basis to use for the house only is my final problem, but it depends on how the total basis is split over the properties.

What is this 90/10 rule, can you give a link?

[tagteam]

@ScottTS 

I get exactly the same figures as do you, so I would trust the program over any manual calculation.