Commercial Rental Real Estate & 1031 Exchange

In the year of sale, where "Cash to Seller" is escrowed for 1031 Exchange, how is the "gain on sale of asset" booked? Is it booked as a liability to
be used as an adjustment to purchased property basis?
I am "just a bookkeeper" with quite a bit of knowledge, and usually depend on a client's CPA to assist me with any questionable JE's. But, in this case client uses EA - and I need to book all entries correctly before financials are turned over. Enough said!!
TIA for any help offered. N Owen
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It sounds like you are trying to book a "gain on sale", which isn't right at this time at all. You don't legally own the escrow account, the intermediary does. There's nothing to book about the escrow balance.
You remove the asset (making a credit entry for it's book cost), remove the accumulated depreciation (making a debit entry for it's book amount), and creating an asset called "escrow basis" (a debit) for the difference. This is your tax basis in the escrow account. There's no gain or loss at this time.
When the replacement property gets closed, you credit the escrow basis account, and credit cash paid and/or mortgage established with the debit entry being your tax/book basis in the replacement property.
The deferred gain never makes it to your books. The replacement property is properly recorded at your historical cost basis + any cash added or borrowed for the purchase.
It's probably not your place to tell the EA what to do, but most people wait on filing the returns (and file extensions if needed) to get the 1031 closed on the back end before preparing the prior year returns.
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Paul Thomas, CPA
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Paul Thomas, CPA wrote:

Paul-Thank you for your response. The "cash to seller" off the closing stmnt is what is deposited to the exchange company. I have a other asset acct set up to hold that figure in. Looks like I need another acct setup to hold the tax/book basis in until property exchange is complete. Again, thanks!
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But it's not your asset. You don't take the property relinquished off the books using the same method you do for a taxable sale.
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Paul Thomas, CPA
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On Fri, 19 Jan 2007 13:38:54 -0500, "Paul Thomas, CPA"

OK-Is the original asset left on the books until exchange is completed? N Owen
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Nope. That asset is gone. You are replacing it with the net book value in the escrow account held by the intermediary.
For the sale of the old property you: Credit the property asset for it's book cost. Debit the accumulated depreciation for the book A/D. Debit an account called "Escrow Basis" or some such title.
You no longer are showing the property you no longer have, you are showing the same asset amount, just in the escrow account.
When the replacement property is closed you: Credit the "Escrow Basis" account. Credit cash for any amount(s) paid. Credit for any mortgages on the replacement property. Debit the account for the replacement property.
You end up recording the new asset at the basis of the old asset + cash paid + debt taken on the replacement property.
There will be some other entries for closing costs and the like on both ends that get woven into the above basic entries.
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Paul Thomas, CPA
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On Sat, 20 Jan 2007 09:35:13 -0500, "Paul Thomas, CPA"

Paul-Thanks for your confirmation. After all our messages - this confirmed how I made the original entry. I just use two different accounts in the original entry when booking the sale. One is an asset (Pending 1031 Exchange) that is the "cash due to seller". This agrees with the closing statement after all items are booked. The other is a current liability acct (Basis-Pending 1031 Exchange), which under normal curcimstances would have been the "gain on sale" or "deferred gain on sale" if that had been the case where the owner carries the note. N Owen
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