What Happens To Depreciation When You 1031?
Two-fold question, when you sell investment property you are normally taxed on the depreciation you took. If you 1031, does depreciation "roll" to the new property, ie you have taken 5 years deprc on the past property, so you now have transferred those five years to the new property?
What happens if you have a single family rental with some depreciation and you use it as your residence, thereby exempting the gain? What does the IRS say about this?
Scott
Related question, to the above. Can you exchange for example: three 200,000 properties into a 600,000 SFR or duplex and use it as your residence to take the equity without cap gains?
Under the current rules, no, not immediately. The replacement property must be used for a qualified investment purpose to keep the exchange intact. Bill Exeter suggests at least one year. Dave T, in earlier discussions, argued for a two year period of investment use before the replacement property is converted to a primary residence.
The most recent changes to the tax codes do allow you to take advantage of the capital gains exclusion for a primary residence that was formerly a 1031 replacement property after five years of ownership. Sell before five years, and you have a taxable capital gain.
Question 1: If no gain is recognized on the exchange, there would be no depreciation recapture. In a simple exchange (one rental prop for another) you would just continue depreciating your old basis just like you have been in the past. If you put money into the deal (exchanged property for one w/ a higher FMV), your old basis would continue unchanged and the excess would be treated as a new asset. If you recognize gain or trade items w/ different lives, the rules change and get somewhat complex.
Question 2: If you sell your principle residence and use the exclusion, the only depreciation you need to recognize as gain is the depreciation taken after May of '97 (I believe that's the right date)
Quote:In a simple exchange (one rental prop for another) you would just continue depreciating your old basis just like you have been in the past. If you put money into the deal (exchanged property for one w/ a higher FMV), your old basis would continue unchanged and the excess would be treated as a new asset. blueford,
So, are you saying that the replacement property basis might have two depreciation schedules? The first schedule is the remaining recovery period of the relinquished property, and the second schedule is a new 27.5 year recovery period for the "new asset".
Example:
I exchange a property I sell for $60K for a property I acquire for $100K. My adjusted basis in the relinquished property is $35K after 10 years of depreciation have been taken. I contribute $40K at the settlement table when I acquire the replacement property. If I am interpreting your post correctly, I would continue to depreciate $35K of my new basis for the 17.5 year remainer of the relinquished property recovery period, while the $40K portion of my replacement property basis is treated as a new asset and recovered over 27.5 years.
Is this a correct interpretation?[ Edited by NewKidinTown2 on Date 11/20/2004 ]