All Forum Posts by: Eddie L.

Let's assume depreciation recapture reverses the benefits you've taken before entirely. One benefit I see here is an interest free loan from the IRS. Let's say you saved $50k in taxes due to depreciation. Doesn't that mean you have $50k of capital at your disposal to invest in other income producing assets? By the time you sell the rental and recapture the $50k maybe 10 years down the road, you're paying $50k in tax but how much did that tax saving earn in the past 10 years? There's a lot of factors that can skew everything here but I think the idea is tax savings now means more money now even if you have to return some or all one day.

***Not a CPA and no filing tax return experience for others***

Barring any changes to legislation, you can invest in a qualified opportunity fund to defer the gain.

https://www.irs.gov/credits-de...

Floor and cap is basically the min and max of how your cash value will be indexed to the for example SP500. For example with a 0% floor even if the SP500 drops 500% this year your cash value will have a 0% movement. On the contrary with a 5% cap, if the SP500 goes up 500% for the year your cash surrender value only goes up 5%. COI is the cost of insurance or the amount to maintain your policy. If 100% of your premiums goes to COI then this is all meaningless right? Not that it would... this is how I understand it so curious for the one you signed up for what are they for your policy

@Dominic Bailey

What were the terms advertised? Floor, cap, coi, etc.

Took a quick look at the GA instructions for individual income tax and so no state modifications that would have GA deviate from the federal treatment for these passive activity gain/losses. In which case, definitely curious what the accountant's logic/support is here. Keep us posted! 

References

GA 2021 IT-511 Individual Income Tax Booklet (SCHEDULE 1 ADDITIONS AND SUBTRACTIONS)

https://dor.georgia.gov/it-511...

***Not a CPA and no filing tax return experience for others***

Cool. Before the experts start posting, let me post my random thoughts. IRS references below are helpful as well. There seems to be two general exceptions listed below for using passive activity losses from one activity to offset passive activity passive activity income from another passive activity. Does your situation fall under any of these? What are the facts in your scenario? Assuming it doesn't, did your accountant note that they can offset for federal purposes but not the state? In which case, maybe there's a specific state exception? Which state is this?

1. Publicly Traded Partnership ("PTP")

"You can offset deductions from passive activities of a Publicly Traded Partnership ("PTP") only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest."

2. Recharacterization of Passive Income

Net income from the following passive activities may have to be recharacterized and excluded from passive activity income.

• Significant participation passive activities,
• Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation,
• Equity-financed lending activities,
• Rental of property incidental to development activities,
• Rental of property to nonpassive activities, and
• Licensing of intangible property by pass-through entities.

References

IRS Publication 925: Passive Activity and At-Risk Rules

https://www.irs.gov/publicatio...

IRS Instructions Form 8582: Passive Activity Loss Limitations

https://www.irs.gov/publicatio...

Interesting...

Albeit, priority for today is probably to file extensions for your federal return and state return, if needed, and make sure you're not underpaid under the more conservative scenario such as no offsetting passive losses against passive gains.

The presentation here has some errors as well. For example, where is P2 ≥ G1 from? P2 should be ≥ the value of the property transferred not the deferred gain of the property transferred. If you sold the property for $1M then the replacement property should be $1M or more. It's probably better to list out a few specific examples like one with no boot no debt, one with boot no debt, one boot yes debt, figure the formula for each of them then list out the if scenarios to apply a formula to each or possibly have one combined formula if that's your end goal.

https://www.biggerpockets.com/...

***Not a CPA and no filing tax return experience for others***

Specific to this example: Basis of the property acquired (B2) = Basis of the property transferred (B1) + Additional Consideration Given (In this case if property transferred was sold for P1 and that was the same amount used to purchase the property acquired then there was no additional consideration given)

B2 = B1

https://www.law.cornell.edu/cf...
If, in an exchange of property solely of the type described in section 1031, section 1035(a), section 1036(a), or section 1037(a), no part of the gain or loss was recognized under the law applicable to the year in which the exchange was made, the basis of the property acquired is the same as the basis of the property transferred by the taxpayer with proper adjustments to the date of the exchange. If additional consideration is given by the taxpayer in the exchange, the basis of the property acquired shall be the same as the property transferred increased by the amount of additional consideration given (see section 1016 and the regulations thereunder).

***Not a CPA and no filing tax return experience for others***

Yea definitely take a look at the article as it's helpful for the overall steps. Conceptually you can think of 1031 as you exchanging your now $450k value property for another $450k property in order to defer the taxes. If you think of it this way then you'll see that in order to full defer the entire gain from your sale, you'll need to use the entire $450k of cash received from the sold property to purchases the replacement propertie(s).

I think the confusion is how much sale proceeds was your transaction. The amount of sale proceeds received in your example is $450k right? You received $450k of cash in your sale which implies your property's value was $450k at the time of sale. If then only use $200k out of the $450k to purchase a replacement property, then you see you just exchanged a $450k property for a $200k property and also received $250k of cash? $250k will be treated as "boot" but will be taxed to you up to the gain from the original sale so that would be the $200k. Effectively this ends up deferring $0 of the gain under 1031.