2022 Tax Planning: Basis of Property Acquired Under Code Section 1031
July 22, 2022
The real estate market has long been attractive for people and businesses looking to increase their net wealth. Additionally, savvy investors who work with their CPA may afford some tax advantages. In certain types of transactions, taxpayers have opportunities to defer gain on the exchange of property, including like-kind exchanges. Like-kind exchanges offer tax planning opportunities to defer gain on the exchange of real property held for business use or for investment in exchange for similar replacement property.
1031 exchanges defer the gain until a taxable sale or exchange occurs. Taxpayers will need to calculate the basis of the replacement property for future reporting and treatment as a gain or loss. To figure your gain or loss on a sale, exchange, or disposition of property, taxpayers must make certain adjustments to the basis of the property.
Basis in like-kind exchanges
The basis of the property you receive is generally the same as the basis of the property you gave up. Suppose you receive money in addition to property. In that case, the basis of the property received is the same as the basis of the property you gave up and includes adjustments for: cash paid, cash received, exchange expenses, and any gain recognized.
Reporting is required in the year of the like-kind exchange to calculate the amount of gain deferred as well as the basis of the like-kind property received in the year of the transaction. Additionally, report the dates of sale and identification of the relinquished and replacement properties. If any cash is received, report the amount of gain recognized for the money or property received. For involuntary conversions, report the gain or loss on your return in the year you realize the gain or loss. Limitations may apply on losses from both transaction types.
It is important to note that to qualify for the 1031 Exchange, you need to follow the IRS’ strict exchange timeline and rules to qualify. It is important that you contact our team to have a tax analysis conducted to determine if a 1031 exchange is the best option and what type of tax savings or liability may exist before you choose this path.