Like to Like

[Marcus Hendren]

Can you roll the sale of an SFR into Ag Land with a 1031? Where is the line drawn on like property to like property? Just trying to compile as many exit strategies as possible.

[Bill Exeter]

@Cheryl C. Sure. Let's assume that you bought and held a single family residential property (SFR) as rental property. Let's further assume that the cost of the property was allocated 80% to building/improvements on the property and 20% to land value.

This means that 80% of the cost, which represents the building/improvements, is depreciable for income tax purposes.  So, you have been depreciating the 80% (building/improvement) portion over the time that you owned the property.

Now, let's assume that you decide you want to sell the SFR and structure a 1031 Exchange transaction by acquiring a vacant lot that will be held for investment purposes.

Here is the problem. The old SFR has depreciable structures on the property while the new vacant lot does not. When you complete a 1031 Exchange your tax advisor must compute the new cost basis of the acquired property, which includes computing the deferred gain, deferred depreciation recapture, old/transferred cost basis, etc.

The problem is there is no structure on the new vacant lot to depreciate and therefore all of the cost basis must be allocated to the land value, which can not be depreciated.  This also means that any deferred depreciation recapture, is recognized and realized (i.e. taxable) in the year of sale since there is no depreciable improvements on the property that you acquired.