1031 Exchanges Also Defer Depreciation Recapture

Posted by Margo McDonnell | Wed, Sep 26, 2012

We’ve all heard a million times that a 1031 exchange defers the gain you have when selling a business use or investment property. What many forget is that you must recapture all of your depreciation at 25%. Depending how long you have owned your property, the depreciation recapture could be a bigger tax bill than the capital gains. 

Let’s look at an exchange that has a property owner purchased commercial real estate in Jan. 1990. He paid $1,000,000 and made no capital improvements.  He took 21 years of depreciation @ $25,641/year = $538,461. The property had a 39 year depreciation life. He is now selling for $5,000,000. Here is a comparison of a 1031 exchange vs. a typical sale transaction.

 

Taxable Sale

1031 Exchange

Sale Price

$5,000,000

$5,000,000

Capital Gains

$600,000

0

Depreciation Recapture

$134,615

0

Federal Tax Liability

$734,615

0

Net Proceeds

$4,265,385

$5,000,000

Buying Power        (putting 25% down)

$17,061,540

$20,000,000

The tax bill to this investor would be $734,615. The portion attributed to depreciation recapture was nearly $135,000. Fortunately, a 1031 exchange allows you to defer both the gain as well as the depreciation recapture so you can keep your money working for you.

Visit our 1031 calculator to estimate how a 1031 exchange would work for you.

 

 

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