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  • 1.  1031 EXCHANGE AND NYS AUDIT

    Silver Most Valuable Member
    Posted 01-31-2022 03:14 PM
    A client of mine did a 1031 exchange in 2016 that NYS has been auditing for 3 years already. I am going to give some rough facts and then ask a question

    They sold property for $18,000,000 and purchased 3 properties in exchange that the actual total costs from the closing statement (FMV) was $17,250,000. The various closing costs totaled about $651,000 so they deemed the shortage and gain at $99,000 which I agreed was correct.

    The basis of the property exchanged was about 1,745,000. I believe that the cost basis of the three properties should be $1,745,000 plus the gain not deferred of $99,000 for a total of $1,844,000

    NYS reduced that number by an item they call "Group deficiency" which is the difference between the sale price of $18,000,000 and the FMV of properties acquired of $17,250,000 or $750,000. They insist that our basis going forward is then only $1,094,000

    Does anyone know if NYS is correct and if so why is that adjustment necessary

    ------------------------------
    Gabriel Bentovim
    HOFFMAN & BENTOVIM, CPAs PC
    Commack NY
    631-499-1500
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  • 2.  RE: 1031 EXCHANGE AND NYS AUDIT

    Silver Most Valuable Member
    Posted 02-01-2022 09:51 AM

    ·       Here is a good place to start.  Exchanged Basis: Means the amount of the depreciable basis in the replacement property that is effectively "rolled over" from the relinquished property after calculating year-of-disposition depreciation for that property. Thus, the replacement property's exchanged basis amount is usually the same as the ending adjusted basis of the relinquished property (after subtracting the year-of-disposition depreciation for that property). [See  Reg. 1.168(i)-6(b)(7)  and (9).]

     

     

    Very truly yours,

     

    ROBERT S. BARNETT

     

     

    Long Island Office:

    487 Jericho Turnpike (NEW ADDRESS!)

    Syosset, New York 11791

    516-931-8100

    Fax: 516-931-8101

     

    New York City Office:

    1385 Broadway, 12th Floor

    New York, New York 10018

    212-661-1144

    Fax: 212-643-1330

     

    www.cbmslaw.com

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  • 3.  RE: 1031 EXCHANGE AND NYS AUDIT

    Posted 02-02-2022 06:07 AM
    Lol maybe you should counter that since basis was reduced, they should agree that gain shouldn't be recognized at all, as is the principle everywhere else in the Code.

    No, that's not correct - basis carries over and boot results in gain recognition from dollar one. Otherwise, you'd recognize the gain twice -- once as boot and once as extra gain when the taxpayer sells. Thought exercise: relinquished property sells all-cash (ignore closing costs). Gain is $18,000,000 A/R - $1,745,000 a/b = $16,255,000.

    Now use NYS fantasy land logic, again ignoring closing costs. $750,000 gain upon the 1031 exchange, and $17,250,000 FMV.  Your client then sells the replacement property the day after buying it.  $17,250,000 A/R - $1,094,000 a/b = $16,156,000 gain.  So between the two transactions, your client has now recognized $16,156,000 + $750,000 gain = $16,906,000.  Ta-da!!  Your client now has $651,000 of extra gain for no reason!!  It's like magic!! 

    What they are failing to calculate is that the $651,000 of closing costs are deductible against the $750,000 of boot, resulting in a $99,000 NET gain. There is no reduction of basis for this at all.

    ------------------------------
    Matthew E. Rappaport, Esq., LL.M.
    Vice Managing Partner
    Chair, Taxation Group
    Falcon, Rappaport & Berkman PLLC
    (516) 558-3377
    mer@frblaw.com
    ------------------------------



  • 4.  RE: 1031 EXCHANGE AND NYS AUDIT

    Silver Most Valuable Member
    Posted 02-02-2022 02:02 PM

    Matt is correct – the NYS position is incorrect and is not supported by the Regulations or the IRS Form 8824

     

    Very truly yours,

     

    ROBERT S. BARNETT

     

     

    Long Island Office:

    487 Jericho Turnpike (NEW ADDRESS!)

    Syosset, New York 11791

    516-931-8100

    Fax: 516-931-8101

     

    New York City Office:

    1385 Broadway, 12th Floor

    New York, New York 10018

    212-661-1144

    Fax: 212-643-1330

     

    www.cbmslaw.com

    _______________________
    Confidentiality Notice: The information contained in this e-mail and any attachments may be legally privileged and confidential. If you are not an intended recipient, you are hereby notified that any dissemination, distribution or copying of this e-mail is strictly prohibited. If you have received this e-mail in error, please notify the sender and permanently delete the e-mail and any attachments immediately. You should not retain, copy or use this e-mail or any attachment for any purpose, nor disclose all or any part of the contents to any other person. Thank you.

     

     



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