Help with 1031 involving SF rental exchanged for two land lots, want to sell lot

[Patricia Via]

new to this site, hoping to simplify whether I should sell a lot purchased when sold a SF rental back in 2006. the gross sales price of the house was 165K, but the net was closer to 151K.  We did a 1031, purchasing two lots, one at 85 and one at 110, or 195K total.  Want to sell the cheaper lot but not sure how to figure the taxes.  The basis of the rental house was approx 64K (bought in 1989). I did total all the depreciation taken on the rental house at 30673.  Maybe someone can tell us if we were supposed to pay the depreciation at the time of the purchase of the land since land cannot be depreciated.  We did not know if this is the case and did not pay any taxes since it was a 1031.  we used LandAmerica as intermediary and nothing was mentioned.  Now they are defunct due to fraud.  If we want to sell the cheaper lot, how to divide the gains between the two lots? Do we divide the depreciation also? we don't plan to sell the 2nd lot, at least not as soon   there were costs involved in buying the lot as well - where would they go?

Hoping someone knowledgeable can help.  Also, the $85K lot was way overpriced in 2006 and is only assessed for $65K; however, the offer has yet to be made, only calls from realtors. It may not be worth the trouble and cost of selling!

Thank you

[Logan Ryan]

Hi Patricia,

I would recommend speaking to Realty Exchange Corp, they specialize in everything 1031 exchange and are based in Virginia. I would ask for Jaci Novak or Tammy Norton over their.

Also, I'm happy to take a look at the lot you are interested in selling to give you a current market value. Just message me the address or tax ID.

Hope this helps!

[Bill B.]

Talk to @Dave Foster for an experts opinion. 

My GUESS would be allocate depreciated cost basis based on replacement %. 

So the 85k property would be 43.5% of the 64k cost basis plus 43.5% of the additional $44k you invested during the exchange. (Call it $47k) the $110k property would be the remainder, call it $61k. 

You didn’t have to pay any taxes during the exchange (capital gains or depreciation) that’s why you did the exchange. But you didn’t get to take any depreciation the land since then. 

So today you would owe capital gains on net selling price of the small lot, minus a $47k cost basis. Plus 43.5% of the depreciation you took previously on the rental house would have to be recaptured. (You don’t say how much but 17 years times 3.6% of the building value times 43.5% is the depreciation recapture amount times probably a 25% tax rate.)

[Dave Foster]

@Patricia Via, RIP Land America!  That was a long while ago and very unfortunate!  Fortunately, they were just the intermediary and had nothing to do with how the taxes were allocated.  Your accountant would have filed the form 8824 which would have reported the 1031 exchange.  This is the critical document for you.  It is very possible that you should have paid the recapture in the tax year of the sale.  That would be the norm when going from depreciable property to non-depreciable property.  Or you may have dodged a bullet and your accountant somehow allocated the depreciation between the two lots and suspended further depreciation.  No way of knowing without talking to your accountant from back then.  Good news is that you are so far past the statute for look backs that you're probably fine.  You'll need to use how it is reported now to determine your taxability now.

[Patricia Via]

Thanks Bill.  I am getting very close to understanding it. The 43.5% is 195/85 right?
So, if I sell the lot for 100K, and pay 4000 in fees, net of 96K. Based on the
presumed percentages - I'd be liable for cap gains on $49K plus 43.5% of the total depreciation on the 30673 or 13342.75 @ 25% which is 3335.69, or a total of 7350 (@15%) plus $3335.69 or grand total of $10686 taxes.
I need to keep reading this over to better understand it.  Thanks again,

[Patricia Via]

Hi Logan!  Yes, a comp would be nice!  the address is 5354 Tavern Lane, Goochland, Va. 23063, 4.7 acres.  Let me know what you thing.  Appreciate it.
Trish Via

[Patricia Via]

Hi Dave!  Yes RIP LandAmerica!  We had no issues with them thankfully.  I did look into the form 8824 (I am my own accountant via TurboTax unfortunately). I did report the form in 2006 and put down my like kind value received as $195K (110 lot and 85 lot) and $64323 as basis of relinquished property, giving us a gain of $130677. Nothing mentioned anywhere on depreciation so my fear of selling is that I am going to be hit with a penalty. Also, due to the complication of figuring it all out, have merely paid the taxes on the land.  But I have a huge capital loss this year with stock sale which would make selling less of a hit. If I can figure it out and decide if its worth it.  Always fearful of doing wrong taxes.  Thanks for your response.

[Logan Ryan]

Quote from @Patricia Via:

Hi Logan!  Yes, a comp would be nice!  the address is 5354 Tavern Lane, Goochland, Va. 23063, 4.7 acres.  Let me know what you thing.  Appreciate it.
Trish Via

 Hi Trish, I'm sending you a private message!