Curious 1031 Exchange Question about Basis & Depreciation

[Geoffrey O'Brian]

Hi smart people,

I have a tax-related question about figuring depreciation basis on a new property received in a like-kind 1031 exchange of rental properties (3-unit for 8-unit). I live, and the buildings are in, Los Angeles, CA where land value constitute a hefty portion of the fair market value, which leads me to my question...

Is value of land vs. building a factor in determining depreciation in property received in a 1031 exchange? If so, how do I factor in? I ask because land vs. building is not mentioned in the calculations for both Adjusted Cost of Property given up and Basis for Depreciation in property acquired (see calculations below).

Calculations for each:

1) ADJUSTED COST BASIS OF PROPERTY GIVEN UP:

Purchase price & costs

+ Improvements to Building

- Depreciation taken.

= Adjusted Basis (Note specific use of Purchase Price & costs, not building cost).

2) BASIS FOR DEPRECIATION OF PROPERTY RECEIVED:

Relinquished property adjusted basis + Any additional Property transferred

- Liabilities assumed by taxpayer (new mortgage)

+ Gain recognized on property

- Liabilities assumed by other party (old mortgage)

= Basis in replacement property  (again, no mention of building vs. land)

Thanks for any light you can shine on this!

Geoff

[Dave Foster]

@Geoffrey O'Brian, You're looking at the 8824 which transfers the basis of the old property into the new property and resets basis and depreciation schedules.

Land is not depreciable.  So there is depreciable basis (building) and non-depreciable basis(land). They are not mentioned specifically but land/building allocation is an important part of the calculation of depreciation for basis, write off, and recapture.