cost basis of a 1031 replacement property

[Daniel Blau]

I am shortly doing a 1031 on an investment property and really there's not a lot clear on how you compute the cost basis of the replacement property or properties.   

From best I can tell the cost basis for the new property  = the adjusted cost basis of the relinquished property + the mortgage on the replacement property - the mortgage on the relinquished property.    So say the adj. cost basis of the old property was $100k, the mortgage on the new property is $80 and remaining mortgage on the old property was $30k. Then the cost basis of the replacement property is $150k (= 100 + 80 - 30).   Is this correct ?  

if so, I have two other questions: 

1.  if I purchase several replacement properties under the 1031 how is the cost basis allocated among these several properties ?   

2.  If I do a cash out refinance on the replacement properties say within a "quick" timeframes like 6 months, does the loan from the refinance count as a mortgage on the replacement property and thus serve to increase its cost basis ?   

Tricky stuff.      

Thanks.    Dan from Jacksonville FL.    

[Dave Foster]

@Daniel Blau, It is tricky :)  But there's a couple ways to think about it that will simplify it in your mind. The mortgage has nothing to do with your basis or profit.  But you actually arrived at a pretty right number.  

Your adjusted cost basis begins with your acquisition cost.  Add capital improvements to that (increases your basis) then subtract depreciation (decreases your basis).  This gives you your adjusted cost basks.

Subtract the adjusted cost basis from your net sale (contract price minus closing costs but not mortgage payoff).  This is your gain.  It is made up of two parts - The part that is capital gain and the part that is depreciation recapture.  The tax rate on each is different.

Now when you work through your 1031 your basis carries forward into the new property.  So if you sold a property for $200K with a $100K basis and purchased another property for $200K which is the minimum to avoid tax then your basis in the new property is $100K.  If you buy a property for $250K then the basis of $100K on the $200K sale carries forward and you are buying $50K more of depreciable basis (because you purchased more than you sold.  So your new basis is $150K just like you said.

But don't think of it as anything to do with mortgage because that can trip you up down the road if doing a partial exchange or reducing mortgage and paying more in cash.

Purchase at least as much as your net sale and you carry forward your adjusted cost basis.  Purchase more than that and the difference is additional depreciable basis.