Residential Real Estate Tax Issues with 1031 Exchanges Example

Services for Real Estate Pros with Exeter 1031 Exchange Services

Residential Real Estate

Example. In January 1986, you paid $1.3 million for an apartment building (not a low-income building), of which $1 million was allocated to the improvements. You depreciated the property using the 175% declining balance method. You sold the property in July 2003 for $2 million. From 1986 through 2003, a total of $915,750 in depreciation was claimed. Assuming the only adjustment to basis was for depreciation, there would be a gain of $1,615,750 ($2 million less remaining basis of $384,250), taxed as follows:

(a) $19,583 (the excess of $915,750 depreciation claimed over $896,167 that would have been allowable using straight-line depreciation) would be taxed as ordinary income;

(b) $896,167 (the depreciation that isn't recaptured as ordinary income under (a)) would be taxed at a rate of 25%;

(c) $700,000 (total gain less amounts in (a) and (b)) would be taxed at a rate of 15%.


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Barbara S. Duncan
RE/MAX Advantage - Searcy, AR
GRI, e-PRO, Executive Broker, Searcy AR
What does your example have to do with a 1031 exchange?
Mar 21, 2008 12:45 PM #1
Steven W. Monk
Exeter 1031 Exchange Services - Fresno, CA
V. P., 1031 Exchange Expert

Hi Barbara,  this was actually a series of posts that explained the process.  as far as a 1031 exchange goes all these taxes as well as depreciation recapture is deferred into the replacement property.  This example was showing what would happen if you didn't complete the exchange. 

If you have any other questions please give me a call. 


Mar 22, 2008 04:09 AM #2
Ginoo Pinoy
I'm a layman trying to figure out some tax forms. Not knowing whether you'd give me a freebie or not but here goes: I sold a rental property in December of 2013 I depreciated straight line for 27 years. I have not received my 1099-B so I'm getting ahead of myself. Other than 1040, A, E, and 8582, would you have an example where I use 8949 and 1041 to give me an idea of where to put the numbers? To make it simple, say bought for $100, sold for $200. Straight line depreciation would be ($100/30 years)*(27) using $100 without the land value. I can't seem to find where the cost of roof replacement goes.
Jan 23, 2014 07:04 AM #9
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Steven Monk

V. P., 1031 Exchange Expert
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