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1031 Exchange – Depreciation Recapture

A 1031 exchange is an allowed method to avoid paying capital gains tax on investment property. If you own property, either personal rental or for business use and looking to purchase additional property or expand, perhaps a 1031 exchange is the way to go.

The rules require for you to make a like-kind exchange and identify three replacement properties regardless of their value, or unlimited replacements so long as their cumulative value does not exceed 200% replacement value. There is a specific time period required to complete the transaction; 45 days identify the replacement property; 180 close the exchange. There are other specific rules, and qualification requirements.

A concept to understand that derives the most benefits of a 1031 exchange is the ability to remove any previously deducted depreciation and avoid “depreciation recapture”.

Depreciation recapture is the gain realized by depreciable property. Most likely if you own rental or business property you are claiming depreciation every year to reduce your taxable income. When you sell this property, the government will want that tax savings back and expect you to identify the depreciation previously reported. If there is a gain, it would be taxed as ordinary income.

To calculate the amount of depreciation recapture, the adjusted cost basis of the asset must be compared to the sale price of the asset. This involves gathering the initial cost and all improvements that add to the cost basis.

If you are looking to complete a 1031 exchange and need someone to help with the calculation of the depreciation recapture, give us a call to discuss further.

Other helpful links:

https://www.cwscapital.com/what-is-a-1031-exchange/https://www.irs.gov/publications/p544

https://www.irs.gov/publications/p544