Q: Two questions on 1031 exchanges: if a client is separately-depreciating assets within a structure, how are those treated during an exchange? Secondly, if the successor property is sold less than one year after it is purchased, is that a short-term capital gain (even though its depreciable basis is the original property, which was held longer than a year)?
James, Alexandria VA
A: Two great questions. If the above is total Greek to you, read my post on 1031 exchanges. More information on them can be found in IRS Publication 544, Sales and Other Exchanges of Property.
The first question deals with (say) a dryer that's installed and is being depreciated over 5 years. The underlying building is being depreciated over 27.5 years, with different starting points. Upon the like kind exchange, the depreciation on the successor property is still the original 27.5 year depreciation life of the original property. But what about the dryer, which presumably was relinquished in the exchange? Assuming there is no "successor dryer," you've exchanged unlike property (the dryer for the building). As such, there is a taxable gain or loss that results. You'd have to estimate the percentage of the new property that is payment for the dryer, subtract off the adjusted basis on the dryer, and pay taxes on the profit.
The second question is on the holding period of the successor property. The confusion here is between the property's basis (which would be the same as the original property's), and the holding period (in this case, less than one year). In my opinion, you would have an ordinary income gain off of a very low base. The only "advantage" you got was to defer the lower capital gains tax at the time of the exchange.
I'd open this up to speculation on the part of others, though--this was a tricky one.
wow!its nice to know about the complete details about the tax and its payment.all kinds of taxes and their information is given in this very much clearly.
Posted by: propertyless | 2008.03.31 at 01:20 AM