Great question about state differences! Most states do follow federal depreciation rules, but there are some notable exceptions. California has some unique rules around bonus depreciation and Section 179 deductions that can affect rental property calculations. New York also has some variations, particularly around certain improvement costs. Texas generally follows federal rules for rental property depreciation, so you should be fine using the federal calculations. However, it's always worth double-checking with your state's tax authority or a local tax professional, especially if you're claiming significant depreciation amounts. The bigger issue for most states is usually around passive activity loss limitations and how rental losses can be used against other income - those rules can vary more than the actual depreciation calculations themselves.

Great breakdown of the cost basis calculations! I went through this exact same process last year with my first rental property and made a few mistakes that cost me money. One thing I'd add to the excellent advice already given - make sure you're accounting for the mid-month convention when calculating your first year's depreciation. Since you placed the property in service in January, you'll get a full year of depreciation, but if it had been placed in service mid-year, you'd only get partial depreciation for that first year. Also, regarding the H&R Block Premium software - I found their rental property section to be pretty limited for complex situations. If you're still having trouble with their Basis Assistant, you might want to consider upgrading to their Self-Employed version or switching to a different tax software that has more robust rental property features. Keep detailed records of everything you're including in your basis calculations. The IRS can ask for documentation years later, and having organized records with clear explanations of why you included certain costs will save you headaches down the road.

Wait I'm confused about something here. Doesn't the original mortgage create complications? If the bank released the frontage lot from the mortgage, wouldn't that be considered debt relief and potentially taxable? Or does the 1031 exchange override that somehow?

This is a really helpful discussion! I'm dealing with a somewhat similar situation where I subdivided investment property for a 1031 exchange, though mine was commercial land rather than residential. One thing I learned from my tax attorney is that you should also consider whether any of your closing costs from the original purchase can be added to your basis. Things like title insurance, legal fees, and survey costs from when you bought the 26-acre parcel can often be included in your adjusted basis calculation, which would reduce your taxable gain. Also, since you mentioned fighting a tax levy - if those legal fees were related to defending your title to the property or protecting your investment, they might also be added to basis rather than treated as a current deduction. The FMV allocation method you're using sounds correct, but definitely document everything thoroughly. The IRS tends to scrutinize subdivided land transactions more closely, especially when there are significant value differences between parcels like highway frontage vs. wetlands. Good luck with Form 8824 - it's definitely one of the more complex forms to navigate!

I can totally relate to that anxiety of waiting for mystery mail! I'm in a similar boat - filed on January 28th and got flagged for verification about 3 weeks ago. From everything I've read here and experienced myself, IRS letters almost never show up with images in Informed Delivery, so that's actually a good sign that it could be your verification letter! The waiting game is brutal, but it sounds like you're right on track timeline-wise. Most people seem to get their letters within 2-4 weeks of being told they need to verify. Once you do get it, make sure to verify as soon as possible - I've seen people here say they got their refunds much faster than the 9-week estimate once they completed verification. Fingers crossed that today's mystery mail is exactly what you're hoping for! The IRS really needs to work on their communication and transparency with this whole process.

I'm going through this exact same situation right now! Filed on February 20th and have been stuck in verification limbo for about 3 weeks now. The mystery mail in Informed Delivery is so nerve-wracking - I literally run to my mailbox every day hoping it's finally THE letter. From reading all the responses here, it's really reassuring to know that IRS letters typically don't show images in Informed Delivery. I had no idea that was normal! I've been getting my hopes up every time I see mail without a preview image, thinking "this has to be it." The waiting game is absolutely brutal, especially when you're counting on that refund. I've been checking Where's My Refund obsessively every morning, but it just keeps saying the same thing. At least now I know from everyone's experiences here that once you actually get the letter and verify, things seem to move much faster than the 9-week estimate they give you. Really hoping your mystery mail today is your verification letter! Please update us when you find out - I think there are a lot of us in the same boat right now just waiting and hoping. This whole process really makes you appreciate how much we rely on that refund money for bills and expenses.

One option nobody's mentioned yet - have you considered an Offer in Compromise? If your financial situation truly doesn't allow you to pay the full amount, even over time, you might qualify to settle the debt for less than you owe. The 433-F is actually part of that application process too.

I went through almost the exact same situation last year with an inherited 401k that created a huge tax bill. Here's what I learned from experience: The IRS will definitely scrutinize your Form 433-F carefully when the amount is over $50k, but they're not necessarily looking to reject your installment plan - they just want to make sure you're paying what you reasonably can afford each month. That said, if you have the ability to pay down to $50k first, I'd strongly recommend doing that. The streamlined installment agreement process for amounts under $50k is SO much simpler. You'll avoid the 433-F entirely, get faster approval (often automatic), and have fewer ongoing compliance requirements. One thing to consider: even if you pay down to $50k initially, you can always request to modify your payment plan later if your financial situation changes. The IRS is generally willing to work with taxpayers who are making good faith efforts to pay. Also make sure you're factoring in the setup fee for the installment agreement ($31-225 depending on how you apply and pay) and the ongoing interest/penalties. Sometimes it's worth exploring other financing options first if you have good credit.

Great discussion here! I'm going through a similar situation with my 1031 exchange and was also confused about the allocation methods. Based on what I'm reading from the tax professional and others, it sounds like the proportional allocation (Option 1) is definitely the way to go. One thing I learned from my CPA is that you should also consider getting the allocation method documented in writing as part of your exchange records. The IRS loves documentation, especially for these larger transactions where the depreciation impact is significant. Also wanted to mention - if you're doing multiple 1031 exchanges over time, consistency in your allocation methodology becomes important. So whatever approach you take here, make sure it's something you can apply consistently to future exchanges. Thanks to everyone who shared their experiences and resources. This has been really helpful for understanding the proper approach.

This is exactly the kind of confusion that trips up so many real estate investors! I went through this same dilemma with my first 1031 exchange about two years ago. The proportional allocation method (your Option 1) is definitely correct. I made the mistake of initially trying the land-first approach because it seemed more "conservative" but my tax attorney quickly corrected me. The IRS expects you to allocate the carryover basis proportionally based on the fair market values of the land and building components in the NEW property, not the old one. One practical tip: if you're going to rely on the town assessment for the 52/48 split, make sure those values are reasonably current and defensible. In my case, the town assessment was from 2019 but I did my exchange in 2022, so I ended up getting a fresh appraisal to be safe. Also, keep really good records of how you determined the allocation percentages. I created a simple spreadsheet showing the calculation and kept copies of all the supporting documentation (assessment, any appraisals, comparable sales data, etc.). The peace of mind is worth it, especially when you're talking about significant depreciation differences like in your situation. The $262k land / $243k building allocation sounds right based on your numbers. That gives you a solid depreciable basis to work with going forward.