Important 1031 Question, Requires A Lot Of Thought
This is my Question:
An investor owns a real property (1250) both land and building with a fair market value of $100,000 and have taken $20,000 of Straight line depreciation and so the adjusted basis of the property is $80,000. This property is exchanged for unimproved land of the value of $100,000. What happens to depreciation? Does the investor pay tax on it and how much is the tax?
This is what I have been told:
According to the new Temp Regs on this topic (Reg. 1.168(i)-6) land is never depreciable nor is it MACRS property. If depreciable property and land are exchanged for land (with no building or improvements), the entire basis of the relinquished property becomes the tax basis of the land acquired as replacement property. So in the example, the basis of the land is $80,000 which means the $20,000 depreciation recapture gain will be postponed until the land sells.
Now the big unanswered question is: is the $20,000 gain depreciation recapture gain at 15 or 25 percent or is it 1231 gain at 5 or 15 percent. No one has ruled in on that one yet but I think some will say that it will be 1250 recapture. Like kind exchanges postpone the tax bite but do not change the character of it. Of course, if they hold on to it for a long time, the chances are pretty good that everyone will forget that it was acquired in a LKE and it will become 1231 gain or even capital gain.
If anyone can point out the IRS regs and documents on this subject, I would appreciate it.
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