What if more than like-kind property is
Included in the 1031 exchange transaction?
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If a taxpayer is involved in a 1031 Like-Kind
Exchange that includes other property (that is not Like-Kind) in the transaction, recognition of gain (and thus payment of tax) may occur.
For Example: Susan 1031 Tax Exchanges her 2-bedroom condominium in Sacramento and $50,000 for Mark’s 3-bedroom house in Phoenix.
In these types of 1031 Exchange transactions, gain is recognized in an amount that is equal to the lesser of the gain realized or the fair market value of the non
Like-Kind property received
in the 1031 Exchange transaction. |
For Example: Susan 1031 Exchanges her 2-bedroom condominium in Sacramento that has a fair market value of $225,000 and $50,000 in cash for Mark’s 3-bedroom house in Phoenix that has a fair market value of $275,000. Since non
Like-Kind Property was also
included in the 1031 Tax Exchange transaction, Mark must recognize a gain. Marks’ adjusted basis in his house is $230,000 after taking deductions for depreciation over the years. His realized gain is $275,000-$230,000 = $45,000. Since this amount is less that the
Fair
Market Value of the cash received, Mark must recognize a gain of $45,000.
The receipt of non Like-Kind Property in a
1031 Like
Kind Exchange does not result in recognition if there is a loss.
Example: Assume the same facts as above, only that Marks’ adjusted basis is $350,000. His realized gain would be $275,000-$350,000 = -$75,000. The receipt of $50,000 in this circumstance does not trigger recognition. The recognized loss is zero. |
