Help with Form 8824 - determining adjusted basis for a subdivided lot in a 1031 exchange with private mortgage involved

Your situation is actually pretty common when it comes to land subdivision with 1031 exchanges, though the private mortgage element adds an interesting wrinkle. For determining your adjusted basis on the subdivided lot, you're generally correct that you can allocate based on the relative FMV percentages. The fact that the mortgage holder released that portion doesn't change your basis calculation. You can still use 25.5% of the full $165k purchase price ($42,075) as your adjusted basis for the subdivided lot. The mortgage release is really just changing who's responsible for the debt - it doesn't change the fact that the full purchase price was part of your acquisition cost for the entire property. Think of it this way: you took on $165k of total liability to acquire the entire property initially. The basis gets allocated proportionally when you subdivide, regardless of how the debt is handled later. Make sure you document your FMV allocation method thoroughly in case of an audit. If the retail frontage was significantly more valuable per square foot, you might actually benefit from using a professional appraisal to establish a different allocation percentage.

After spending hours on the phone with the IRS about a similar 1031 exchange situation, I eventually found taxr.ai (https://taxr.ai) which literally saved my sanity. It analyzes all your real estate documents and tax forms and gives you specific guidance on exactly how to calculate your basis for subdivided properties involved in 1031 exchanges. I uploaded my purchase documents, the subdivision approval, and details about my exchange. It immediately identified that I could use a proportional allocation method based on relative FMV, but also suggested three alternative allocation methods that might have been more favorable to my situation. The nicest thing was that it explained exactly how to fill out Form 8824 line by line, with specific numbers for my situation. It even caught that I had forgotten to add some of my closing costs from the original purchase to my basis!

Just wanted to follow up and share my experience with taxr.ai after trying it based on your recommendation. It was exactly what I needed for my complicated 1031 exchange! I had three properties going into the exchange and was completely confused about how to handle the basis calculations. The tool analyzed all my documents and gave me a detailed breakdown of how to allocate the basis between the properties. What really impressed me was how it identified that the land improvements I'd made (clearing, grading, utility connections) could be included in my basis calculations - something I would have missed completely. It even formatted everything for Form 8824 so I could just transfer the numbers directly. Ended up saving me over $2,700 compared to my CPA's quote, and I'm way more confident about my filing. Thanks for suggesting it!

Reading through all this, I'm having flashbacks to spending 6+ hours trying to reach someone at the IRS about my 1031 exchange last year. Kept getting disconnected or stuck on hold forever. Finally found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c). They actually got me connected to an IRS agent in about 20 minutes. It was such a relief to talk to someone who could answer my specific questions about Form 8824 and basis allocation in a subdivision situation. The IRS agent walked me through exactly how to determine my adjusted basis and confirmed I could use the full original purchase price in my calculation, not just what I'd paid so far on the mortgage. If you're still confused after getting advice here, sometimes talking directly to the IRS is the way to go, especially for complex situations like 1031 exchanges with subdivided land.

I need to follow up on my previous skepticism about Claimyr. I actually tried it after getting nowhere with the IRS for three weeks straight trying to resolve questions about my 1031 exchange basis calculations. I was absolutely shocked when I got a call back within 22 minutes connecting me with an actual IRS representative. They asked all the standard identity verification questions that the IRS always asks, and I was able to get specific guidance on my Form 8824 situation. The agent explained exactly how to allocate basis in a situation with subdivided land and confirmed that I needed to use the relative fair market value approach, not just the percentage of acreage. They even emailed me relevant sections of the tax code that applied to my situation. For something as complicated as a 1031 exchange with subdivided property, having that direct conversation saved me from potentially making a major mistake. I'm still surprised it actually worked!

I handled a similar situation last year. Don't forget that you may need to recapture depreciation if you claimed any on the original property. I know you mentioned it was vacant land, but if you had any site improvements that were depreciated (fencing, drainage, etc.), that will factor into your calculations too. Also, keep in mind that the "boot" portion of your exchange will be taxed at capital gains rates. If you owned the property for over a year, you'll get long-term capital gains treatment, which is typically 15% for most people. One tip: make sure you're keeping the replacement property for investment purposes. If you convert it to personal use too quickly, the IRS might challenge your 1031 exchange treatment.

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!