Reverse 1031 Exchange - Tax Question

[Chuck E.]

Here's my reverse 1031 story:

I bought my replacement property on 11/27/18, with the EAT as the title holder.

My relinquished property was sold on 12/31/18.

The EAT assigned its membership interest to me on 1/3/19.

For tax purposes, I know that on form 8824 line 6 I report the replacement property as being acquired on 1/3, since it was "parked" from 11/27 til 1/3. However, the IRS will see that I've claimed expenses and depreciation for my replacement property on form 1040, even though I didn't "acquire" it til 1/3/19. Wouldn't this raise red flags? I thought I'm allowed to claim depreciation and repair expenses during the time the replacement property is parked? Please let me know if I'm missing something here. Thanks!!

[Dave Foster]

@Chuck E. if your QI sets the reverse exchange up correctly then the EAT should have leased that property to you on an absolute NNN lease. This means that all taxes insurance and maintenance would have been your responsibility and you would report them as a normal operating expense - probably Schedule C.

So by virtue of the NNN lease you already have access to all expenses (and income) of the parked property. That's why it's not an issue usually @David Taylor.

Depreciation is a little different. In your case it's You can't receive depreciation benefit on an asset you do not own. However the entity that owns the asset does indeed depreciate it. So you would get depreciation for the year in which you took membership interest in the LLC indirectly because the LLC actually owns the asset. And you own the LLC.