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------------------------------
Original Message:
Sent: 01-31-2022 03:14 PM
From: Gabriel Bentovim
Subject: 1031 EXCHANGE AND NYS AUDIT
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
------------------------------