Deferring Depreciation Recapture with a 1031 Exchange

It is common knowledge that a taxpayer can defer their federal and state capital gains by performing a 1031 Exchange. But many taxpayers forget that they will also defer their recapture of depreciation if handled properly.

For example, if a taxpayer purchased a residential property in 2000 for $300,000, they could be depreciating that property $5,000 per year. Should they sell that property in 2022, they would have depreciated the property for 22 years. 22 years @ $5,000 per year means they have depreciated the property $110,000.

If they were to not exchange, the recapture of depreciation rate is 25%. Therefore, their tax liability solely on the recapture would be $27,500.

And remember that the depreciation would be higher on higher valued properties including commercial properties.

Fortunately, the 1031 Exchange defers the recapture as well as your capital gain liabilities.

For additional information, please reach out to your tax professional for specific questions or contact the specialists here at Security 1st Exchange for assistance.