Need help with journal entries for 1031 Exchange

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#1
cdebts  
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Location:
Austin, TX
I have a client who used a qualified intermediary to conduct a 1031 exchange for rental properties. They disposed of two properties and acquired one new one. The details of the properties and expenses are below with simplified amounts to make it easier to get help. I thought I had the journal entries correct because everything balanced, but then when doing the taxes it looked like they would have a much greater gain on the exchange than they should. I think made myself confused by trying to look up examples, and I need help with these journal entries and the proper adjustment to schedule M-1 for the deferred gain.

First Property:
Book Value: $95,000
-Accumulated Depreciation: $12,000
Adjusted Basis: $83,000

Sale Price: $240,000
-Expense of Sale: $17,000
-Adjusted Basis: $83,000
Realized Gain: $140,000

Sale Price: $240,000
-Cancellation of Debt: $88,000
-YTD Property Taxes: $1,000
-Expense of Sale: $17,000
Exchange Proceeds: $134,000

Second Property:
Book Value: $180,000
-Accumulated Depreciation: $28,000
Adjusted Basis: $152,000

Sale Price: $480,000
-Expense of Sale: $31,000
-Adjusted Basis: $152,000
Realized Gain: $297,000

Sale Price: $480,000
-Cancellation of Debt: $125,000
-YTD Property Taxes: $4,000
-Expense of Sale: $31,000
Exchange Proceeds: $320,000

Like Kind Property:
FMV of like-kind property received: $630,000
-NBV of relinquished property ($152,000 + 83,000): $235,000
Realized gain or loss: $395,000

One of my journal entries was similar to this:
Dr [Fixed Asset] FMV of like-kind property received: $623,000
Dr [Expense] Expense of Purchase: $3,000
Cr [Liability] New Debt: $172,000
Cr [Asset(?)] Exchange Proceeds (from properties given up): $454,000
Cr [Contra Property Tax Expense] YTD Property Taxes (paid by seller): $1,000
Cr [Cash] Deposit (net after refund of partial deposit): $6,000

Thanks in advance for the help!
 

#2
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North Carolina
I don't do many 1031 exchanges, but just looking at your journal entry, some things seem off from your facts. You show total expenses of sale on both properties of $48,000, but your AJE shows $3,000. Facts show $5,000 in taxes paid, but journal entry shows $1,000. In your facts, I don't see anything about a deposit or a Note Payable but they are in the AJE. Seems we are missing a few things in your facts.

Also you might get a better response if you post in the tax forum so more will see it.
 

#3
cdebts  
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8
Joined:
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Location:
Austin, TX
Seaside CPA wrote:I don't do many 1031 exchanges, but just looking at your journal entry, some things seem off from your facts. You show total expenses of sale on both properties of $48,000, but your AJE shows $3,000. Facts show $5,000 in taxes paid, but journal entry shows $1,000. In your facts, I don't see anything about a deposit or a Note Payable but they are in the AJE. Seems we are missing a few things in your facts.


Sorry for any confusion. The Journal Entry I showed was only for the property received, and does not include the two properties sold. The transaction to purchase the replacement property had $3,000 for the expense of purchase and $1,000 in YTD taxes paid by the seller. The transactions for the two properties given up had a combined selling expense of $48,000, and a combined Property Tax paid of $5,000. For clarity each property would have its own journal entry, and I assumed there would be a temporary account to show the proceeds from each sale that were applied to the replacement property. (None of these were received directly since they went through the QI.)

Seaside CPA wrote:Also you might get a better response if you post in the tax forum so more will see it.


I will post this in the tax forum as well per your suggestion. Thanks.
 

#4
cdebts  
Posts:
8
Joined:
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Location:
Austin, TX
Since I can't edit my original post, I am going to re-write it and ask slightly different questions now that I think I have the journal entries closer to correct.

I have a client who used a qualified intermediary to conduct a 1031 exchange for rental properties. They disposed of two properties and acquired one new one. The details of the properties and expenses are below with simplified amounts to make it easier to get help.

What account types should be used for the exchange proceeds and for the gain? Should the realized vs. unrealized gain be separated, or is that unimportant for practical purposes? Also, since the book value of the replacement property is $630k, but the adjusted basis of the exchanged properties was only $235k, the depreciable basis for the replacement property should only be $235k and there should be a $395k book to tax difference on Schedule M for the taxes, correct?

First Property:
Book Value: $95,000
-Accumulated Depreciation: $12,000
Adjusted Basis: $83,000

Sale Price: $240,000
-Adjusted Basis: $83,000
Potential Gain: $157,000
-Expense of Sale: $17,000
Realized Gain: $140,000

Sale Price: $240,000
-Cancellation of Debt: $88,000
-YTD Property Taxes: $1,000
-Expense of Sale: $17,000
Exchange Proceeds: $134,000

Journal Entry for First Property:
Dr [Asset(?)] Exchange Proceeds: $134,000
Dr [Liability] Existing Loan Balance: $88,000
Dr [Expense] Expense of Sale: $17,000
Dr [Expense] Property Taxes: $1,000
Dr [Fixed Asset(contra)] Accumulated Depreciation of First Property (to zero balance): $12,000
Cr [Fixed Asset] First Property (to zero balance): $95,000
Cr [(?)What Account Type?] Realized Gain from Sale/Exchange: $140,000
Cr [(?)What Account Type?] Unrealized Gain used to pay sale expenses (would be in gain above, but is not included in realized gain): $17,000

Second Property:
Book Value: $180,000
-Accumulated Depreciation: $28,000
Adjusted Basis: $152,000

Sale Price: $480,000
-Expense of Sale: $31,000
-Adjusted Basis: $152,000
Realized Gain: $297,000

Sale Price: $480,000
-Cancellation of Debt: $125,000
-YTD Property Taxes: $4,000
-Expense of Sale: $31,000
Exchange Proceeds: $320,000

Journal Entry for Second Property:
Dr [Asset(?)] Exchange Proceeds: $320,000
Dr [Liability] Existing Loan Balance: $125,000
Dr [Expense] Expense of Sale: $31,000
Dr [Expense] Property Taxes: $4,000
Dr [Fixed Asset(contra)] Accumulated Depreciation of Second Property (to zero balance): $28,000
Cr [Fixed Asset] Second Property (to zero balance): $180,000
Cr [(?)What Account Type?] Realized Gain from Sale/Exchange: $297,000
Cr [(?)What Account Type?] Unrealized Gain used to pay sale expenses (would be in gain above, but is not included in realized gain): $31,000

Like Kind Property:
FMV of like-kind property received: $630,000
-NBV of relinquished property ($152,000 + 83,000): $235,000
Realized gain or loss: $395,000

Journal Entry for Replacement Property:
Dr [Fixed Asset] FMV of like-kind property received: $630,000
Dr [Expense] Expense of Purchase: $3,000
Cr [Liability] New Debt: $172,000
Cr [Asset(?)] Exchange Proceeds (from properties given up): $454,000
Cr [Contra Property Tax Expense] YTD Property Taxes (paid by seller): $1,000
Cr [Cash] Deposit (net after refund of partial deposit): $6,000

Thanks in advance for the help!
 


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