1031 exchange multiple years

[user4531223]

I have a question about how to input the adjusted cost basis for a 1031 exchange (8824).  

Let's say 

1- I purchased lot 1 in 2021 for 100k , I sold it for 200k

2- With that money I purchased a lot 2 for 240k (I added 40k out of pocket). This was submitted as a like kind exchange for 2021.

3- In 2022 I sold 50% of lot 2 for 260k and bought lot 3 for 320k (adding 60k out of pocket)

How much is the Adjusted basis of Like-kind property I gave up in 2022? Does it have to take into consideration the transactions of year 2021? 

[DianeW777 · Accepted solution]

Yes, the 1031 exchanges begin with the original lot purchased in 2021. With each trade there is deferred gain and the cost basis begins with and continues with the original cost basis, then is increased by any additional buy up charges.

1. Lot 1: $100,000 - Cost Basis (Tax deferred gain of $100,000 from sale)
2. Lot 2: $140,000 - Cost Basis ($100,000 paid for the first lot plus $40,000 buy up additional funds)
3. Lots 1-3: $130,000 - Cost Basis for all three lots ($140,000/2 lots = $70,000 + $60,000 buy up additional funds | $190,000 deferred gain ($260,000 - $$70,000)

IRS Fact Sheet-1031 Exchange

Form 8824 Instructions

If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

[user4531223]

Thank you for your response. Can you check your last line about the total for the deferred gain? I just want to make sure it is correct. Shouldn't the deferred gain be ($260,000 - 130,000 [70k+60k])? To take into consideration the extra 60k out of pocket.

[GeorgeM777]

The calculations/comments by @DianeW777 are correct.  Your deferred gain in connection with the sale of Lot 2 was $190,000.  The $190,000 was realized but not recognized, and that amount was added to the cost basis of $70,000, and the resulting number was $260,000.  As you explained in your post, you added $60,000 of your own funds to complete the purchase of Lot 3.  Therefore, the cost basis of Lot 3 is $130,000, of which $70,000 is the former adjusted cost basis of Lot 2, and $60,000 of which is your own funds.   The realized but not recognized gain of $190,000 is deferred.   Thus, the cost basis in Lot 3 is $130,000.  

@user4531223 

[user4531223]

Thank you. That was very helpful.