There are two types of gain in a 1031 exchange. If your relinquished property has improvements (such as a building), that building is depreciated over 39 years. But there are components of the building that are not critical to the structure (things like ornamental lights, non-structural walls, and more). These non-critical components can be segregated out for more rapid depreciation in a cost segregation study.
In a real estate transaction, you may have two kinds of gain:
1250 Gain. The gain from the sale of the land (which has slow and steady depreciation).
1245 Gain. Accelerated depreciation from the non-critical components that depreciate at a faster rate.
If you don’t exchange into a replacement property with an equivalent amount of 1245 components, you could have some recognition of gain. You can still do a 1031 exchange from improved property to unimproved property, but you have to consider your accelerated depreciation. Sometimes it’s better to buy a replacement property that contains a lot of 1245 components.
1031 Exchange Transactions Made Easy
Contact the team at CPEC1031, LLC today to learn more about the 1031 exchange process and see how we can help you save money in capital gains taxes when selling qualifying real estate. You can reach out to us at our Twin Cities office, which is located in the heart of downtown Minneapolis. Note that we work with taxpayers conducting 1031 exchanges throughout the state of Minnesota, as well as the United States at large. No matter where your property is located, our intermediaries can help you defer taxes in a 1031 transaction.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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