1031's. I put this question to their "Ask an Expert" at zinnerco.com, no answer, 3 days now: take a look TT advisors please, appreciated.

[j g]

I'm not going to try game the system, but I'm curious on the following:

Say I sell at large piece of land for $15,000,000 at the end of 27
years of holding. I make 14,000,000 on it, proceeds (bought for 1 million). From Turbo Tax
inputting, the tax appears to be in the vicinity of $5,000,000. I want
to see if I can do ANYTHING with the 1031 mechanics as follows:

I buy an apartment building and its land within the 45 days of the sale above for
$400,000. This is certainly not equal or greater value, but can I
invoke a 1031 exchange and get some kind of prorated cap gain deferral
on the taxes I'm going to owe for the $14,000,000 gain? The taxes, I'm
noticing, are huge.  Any kind of
deferral could help.

If this is possible, and noting the taxes before any 1031 consideration
are in the vicinity of $5,000,000, approximately what amount, in the
above scenario, would one be able to get deferred of this 5,000,000?

[AmyC · Accepted solution]

A 1031 must be in place and use an authorized agent to even start the process. You would have paid a fee to the agent and they received  your settlement funds.  If you did not have that in place when you sold the property and purchased the new, there is no chance of doing it later.

Like-Kind Exchanges - Real Estate Tax Tips

[Mike9241]

even if got done correctly, there would be no deferral because the FMV of the new property is less than the tax basis of the old property. you're trading down. 

[j g]

When you say "tax basis," do you mean the assessed value of the sold property at time of sale?

[tagteam]

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@j g wrote:

When you say "tax basis," do you mean the assessed value of the sold property at time of sale?

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Assessed value generally refers to the value assigned by the local (typically county) real estate tax assessor/appraiser for the purposes of real estate (ad valorem) taxes.

Your tax basis would normally be your cost plus the cost of any improvements made, less accumulated depreciation (total depreciation deductions taken or could have been taken).

In short, with a 1031 exchange, if the FMV of the replacement property is less than the FMV of the relinquished property, you usually have boot, which is taxable. For example, if the FMV of the property you are exchanging is $15,000,000 and the FMV of the property you are receiving is $14,000,000, you have "boot" which is subject to tax).

Since, as @Mike9241 indicated, the FMV of the replacement property in your proposed scenario is actually less than your basis in the relinquished property, there would be no deferral. 

Further, as @AmyC indicated, you cannot set up a 1031 exchange after the fact. If you received the proceeds from the sale of your property (actually or constructively), then it is too late for a 1031 exchange. 

[j g]

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@tagteam wrote:

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@j g wrote:

When you say "tax basis," do you mean the assessed value of the sold property at time of sale?

---

Assessed value generally refers to the value assigned by the local (typically county) real estate tax assessor/appraiser for the purposes of real estate (ad valorem) taxes.

Your tax basis would normally be your cost plus the cost of any improvements made, less accumulated depreciation (total depreciation deductions taken or could have been taken).

In short, with a 1031 exchange, if the FMV of the replacement property is less than the FMV of the relinquished property, you usually have boot, which is taxable. For example, if the FMV of the property you are exchanging is $15,000,000 and the FMV of the property you are receiving is $14,000,000, you have $1,000,000 in "boot" which is subject to tax).

Since, as @Mike9241 indicated, the FMV of the replacement property in your proposed scenario is actually less than your basis in the relinquished property, there would be no deferral. 

Further, as @AmyC indicated, you cannot set up a 1031 exchange after the fact. If you received the proceeds from the sale of your property (actually or constructively), then it is too late for a 1031 exchange. 

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At this point I'm looking for a cutoff % in any 1031 setup. You seem to be saying a 1031 exchange could go forth if the replacement property was 14,000,000, (14/15= .933, 93%) but posters replying say the replacement property of 400,000 wouldn't work. Where's the cutoff that creates a legitimate 1031 exchange? Otherwise, if none, it would seem one simply owes a lot more tax on boot in the 400,000 replacement property. 

[Critter-3]

If you sell a property for $15mil but only buy a replacement for $400K then you will have a taxable gain of $14,600,000.00  ... you can only defer the $400K not the entire $15mil.   If you really have this kind of situation then PLEASE  talk to a local professional so you get the correct answers you need and not rely on nameless faceless folks on an internet forum. 

[tagteam]

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@j g wrote:
At this point I'm looking for a cutoff % in any 1031 setup..........Where's the cutoff that creates a legitimate 1031 exchange?

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First of all, there are strict rules for 1031 exchanges. You cannot simply sell your property, receive the proceeds, and then purchase another property within a certain time frame to effect a valid exchange for federal income tax purposes. Almost in all instances, a party will use a qualified intermediary (QI), aka 1031 exchange facilitator, who will receive the proceeds and the deeds and then distribute both accordingly. 

Next, the "cutoff" has an impact on the amount of deferral, not the validity of the exchange (which is explained, in short, in the paragraph above). 

Again, if you exchange property you own that has a fair market value that is higher than the fair market value of the replacement property, you are most likely going to have "boot" to the extent of the difference.

[j g]

Thank you Critter-3 and all who've replied. Your:

"you can only defer the $400K not the entire $15mil."

So this would ACTUALLY be allowed by the IRS, given all your timings were good and you went through the 3rd party, QI (Qualified Intermediary) and all? A guy replying earlier had said "no, (the 400,000 example-replacement) because you'd be trading down not up." I mean, from the IRS's perspective, if you do all this right, the 400,000 replacement property would work (as long as you pay taxes on 14,600,000)?

[tagteam]

You mentioned earlier that your basis was $1,000,000 so your realized gain on this deal is not going to exceed the FMV ($15,000,000 that you received for the property you relinquished) less your basis of $1,000,000. 

Thus, your realized gain would be $14,000,000 (the same as if you had not done an exchange).

I suspect the confusion here is the result of the specific fact pattern, which involves a replacement property that has a FMV less than the basis of the relinquished property ($400,000 v $1,000,000). There does not appear to be any real tax benefit in that scenario and that is precisely what @Mike9241 was stating in his post.