1031 Capital Gains & Depreciaiton Treatment ?
Need to know if I understand this correctly.
I have a commercial property under triple-net lease (property A) that in a few years will be 1031 exchanged for a new property (property B). I will hold property B for a few years then cash out and pay the taxes.
Before the 1031 exchange property A had an initial basis of 100K and is being depreciated in a normal manner(10K total). When I do the 1031 exchange, property A is sold for 200K and property B is purchased for 200K. Property A's basis is transferred to property B adjusted by A's depreciation resulting in a 90K bases for B. Property B is depreciated for a few years and sold for 300K.
1) Is B depreciated bases on its 90K basis or on its 200K purchase price?
2) When B is sold I pay capital gains on B's sale price of 300K less any remaining basis and 25% recapture tax on the total of both A and B depreciation.
Do I understand this correctly?
Thanks,
Craig
1) You are right on the money in your example. The new basis for B is the old basis for A or $90,000. The cost basis for B is the carried over basis from A or $90,000, so you would continue the same depreciation method and amount for property B. The difference from the $90,000 and the purhcase price of $200,000 is two items: deferred depreciation of $10,000 and deferred capital gain of $100,000.
2) You are correct. The depreciation would be "recaptured" and taxed at 25% for Federal (plus state taxes, if any) and your capital gain would be taxed.
[addsig]
When completing a 1031 exchange transaction the adjusted cost basis from the first property (property A) is carried forward into the replacement property (property B) and the depreciation method and depreciation period carries forward as well.
The only time there would be a change in depreciation method or depreciation period would be if the replacement property has increased the cost basis by trading up (in your example, you sold for $200 and bought for $200, so if you bought for say $300 you would increase your cost basis by $300). The value added/traded up would be subject to current depreciation methods and time periods.
If the relinquished property (property A) was purchased under an older depreciation method and depreciation period it would continue with the new property. If you trade up in value, the old basis would continue with the old depreciation method and time period and the amount that you traded up by would be treated as new cost basis and depreciated using the current depreciation method and schedule (you would have two different depreciation methods and schedules).
It can get really confusing with multi-property exchanges with multiple depreciation methods.
[addsig]