Q:

Subject: Exchange Question

Dear Sir or Madam:

I want to do a partial 1031 exchange. I am selling a relinquished rental property at $550K with a present mortgage of $285K in Virginia, and buying a replacement rental property at $275K with $0 mortgage in Florida. I am expecting an equity of approx. $240K from the relinquished property which I will fully invest into the replacement property and add $35K from my other sources. My net adjusted basis is $0 since the property has been fully depreciated.  I am trying to determine what percentage of my total tax (Federal and State Capital Gains, and Recapture of Depreciation will I be able to defer)?  My Recaptured depreciation tax is approximated at $22K; my Federal Capital Gains at $67K, and my Virginia Capital Gains at $30K if I do no exchange at all.  I have the following questions:

-Will I defer any Capital Gains in such a partial 1031 Exchange?

-If I do the above partial 1031 Exchange — what approximate amount will I pay Federal and State capital gains on and what amount will I have to pay recaptured depreciation on?

 

In summary, I am trying to determine if such a partial 1031 Exchange will defer any taxes for me. 

 

Thank you much,

A:

 As you describe the situation, you would save some capital gains taxes by doing a partial 1031 exchange. 

However, the taxes you will be saving will be the lowest taxes and not just half of the total possible. 

Whenever you do a partial exchange by missing the reinvestment target price, the first taxes that will be payable will be the most expensive ones, which are generally on the depreciation recapture.  After all of those have been picked up, will you get into the lower long term capital gains rates, which are the ones you would reduce under your proposed scenario.

If you need to know exactly how much tax you will save by doing a partial exchange, your personal tax advisor should be able to plug the applicable numbers in for you.

Good luck.

Kerry Kerstetter