Computing Gain For Multi-Property 1031 Exchange
An exchange of multiple properties or assets can be a tax-deferred like-kind exchange. A 1031 exchange of multiple properties or assets occurs if there is one or more relinquished properties being sold and transferred and/or one or more like-kind replacement properties being identified and acquired.
The computation of any excess gain to be recognized can be a little more complicated when multiple properties or assets are involved with in the tax-deferred exchange transaction. The following is an extremely brief and concise overview of computing excess gain to be recognized from a 1031 exchange. You should always have your transaction reviewed by your legal and tax advisors prior to completing any 1031 exchange transaction.
Calculating Gain From 1031 Exchange
To compute excess gain to be recognized in a 1031 exchange of multiple properties or assets, these steps are followed:
1. The relinquished properties sold and the like-kind replacement properties acquired should be segregated or sorted into exchange groups. The majority of 1031 exchanges involve only real estate, so only one group of assets would be involved. 1031 Exchanges of personal property will almost always involve multiple groups.
2. The liabilities that you assumed as part of your 1031 exchange will be offset by the liabilities you were relieved of as part of the tax-deferred exchange, whether the liabilities are recourse or nonrecourse and whether they're secured by or otherwise related to specific property transferred or received as part of the exchange.
If the amount of liabilities you assume exceeds the amount of liabilities that you were relieved of, the excess amount is allocated among the various exchange groups in proportion to the aggregate fair market value (FMV) of the properties that you received in the exchange groups. The amount allocated to an exchange group can't exceed the aggregate FMV of the properties received in the exchange group.
3. For each tax-deferred exchange group, an exchange group surplus or an exchange group deficiency, if any, must be determined.
4. The 1031 exchange rules and regulations are applied separately and individually to each 1031 exchange group to determine the amount of any excess gain to be recognized, and the basis of the like-kind replacement properties received.
Section 1.1031 of the Department of the Treasury Regulations provides numerous examples for these computations. You can file one summary IRS Form 8824 with a statement showing the required information for each exchange.
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