1031 Equel Or Greater Value Rule, But What About Commssions?
I know the rule about 1031 exchanges:
Like kind property must be equel or great value, but...
If I sold the property for $500,000, the loan was $420,000, and the commission I paid was $25,000.
What shold the total value of the replacement property be? Will it be sale price minus commissions = $475,000? There is no depreciation for this property and no improvemetns.
In an exchange, the costs of transferring property to a new owner, such as selling expenses, are added to the adjusted basis of the property. Selling costs do not reduce the contract sale price of the relinquished property.
So, in your example, your $500K relinquished property will need to be replaced with property that costs at least $500K to keep the exchange fully tax deferred.
I am getting conflicting information for the web.
if that property is exchanged for property of a like-kind. In general terms, the taxpayer disposes of his or her currently owned property (the "relinquished property"
for other property acquired in the exchange (the "replacement property"
. The value of the replacement property must be equal to or greater that the value of the property relinquished in the exchange in order to obtain complete tax deferral. Value, for these purposes is generally the purchase price, adjusted for bona fide closing costs.
It seems to me that this website does not agree with the previous post.
*.floridaexchange.com/1031FAQs.htm
*=www
It states "How does the tax deferral of Section 1031 work?
The tax code provides that the gain on disposition of certain types of property is not recognized (this is known as "non-recognition treatment"
For example, if a taxpayer relinquishes property for a purchase price of $100,000.00 and incurs closing costs of $7,500.00, that taxpayer must acquire replacement property having a value of $92,500.00 (the purchase price less the closing costs). The value of property acquired is the purchase price of the replacement property plus the closing costs incurred in that transaction.
The consequence of acquiring replacement property of a lower value than the relinquished property is that the difference in value is taxable and not deferred.
While the tax liability on disposition of the property is deferred, the basis of the replacement property is carried over from and equal to the basis of the relinquished property, plus or minus adjustments related to the value of the property acquired and whether that value is equal to, less or more than the value of the relinquished property."
Can someone find a definite answer?
[ Edited by yeee-haaa on Date 06/26/2005 ]
[ Edited by yeee-haaa on Date 06/26/2005 ]
[ Edited by yeee-haaa on Date 06/26/2005 ][ Edited by yeee-haaa on Date 06/26/2005 ]
The equal or greater in value is determined based on the "net sales price", which is the sales price minus "routine" closing costs such as brokers commission, title fees, escrow/closing agent fees, recording fees, exchange fees, etc. So you could sell a property for $500K with a net sales price of $450K and the $450K would be the "replacement value" that you would need to replace. Similarly, if you acquired a replacement property for $425K you would add the "routine" closing costs to the value of the purchase which would increase the replacement cost to say $450K and you would have an equal exchange of same value.
[addsig]
Thank you....