1031 Exchanges - multiple properties

[Sastry Srini]

Folks, I have a question about a scenario. 

Bought SFR at $235k (Depreciation base: $200k) in 2016. The property depreciated for 7 years

Loan on property: 200k ;   Current market price: $360k

If I do 1031 exchange on this property to 3 SFR (each valued ~ $120k and still meeting 1031 rules ) for better cashflow and appreciation. I want to sell 2 of SFR after a year. how would the depreciation base be calculated?

is it a good approach to unlock equity? please comment on this approach.  

Thanks in advance .   

[Dave Foster]

Thanks for that shout out @Bill B..  @Sastry Srini, As @Brandon Bruckman said, your depreciation follows you.  The only change to your property basis would be if you purchased more property than you sold.  That would add depreciatble basis.  And would result in less net profit if you then sold after a year or so.

When you buy the three replacements the basis of the old property is divided between the three purchases.  It's usually a ratio of size of purchase or size of property.  Something that can be consistent.  So if you later sell one or two of those properties you will only ba paying part of the deferred tax from the 1031.  Is that a good idea?  Well, it's a better idea than paying all the tax for sure.  And it does let you manage your tax bill better.

@Dylan Johnson, is correct that there is no statutory holding period.  However, far more folks are comfortable with any hold for more than a year.  There was even a mantra in our industry for a long time - "one year and one day".  The only magic is that in that situation no matter when you purchased the property you owned it across two calendar years.  And you reported it on two consecutive tax returns.  Thus satisfying a couple court rulings saying "two tax years" and "two calendar years".   The statutory standard truly is your intent to hold for productive use.  And how you can demonstrate your intent. 

In the event you are anticipating (the 1031 and then the later sale of one of the assets).  What you'd be most concerned with is holding the property long enough to qualify for long-term capital gains treatment.  Usually, in a 1031 exchange, the holding periods are tacked together.  So you would be well within the LT cap gains window.