1031 Exchanges:
Do You Carryover or Restart?
A Section 1031 Exchange is a powerful tax code tool for real estate investors. Commonly referred to as a “like-kind exchange,” it allows taxpayers to defer paying capital gains taxes on the sale of investment or business property as long as the proceeds are reinvested into another qualifying property.
Since the Tax Cuts and Jobs Act of 2017, 1031 Exchanges apply only to real property – not personal property. This means you need to be be aware of the difference, especially if you are conducting a Cost Segregation Study on the new property. We previously wrote an entire white paper on this subject and you can read that HERE.
Which Is Right For Your 1031 Exchange Property
When you complete a 1031 Exchange, the basis of the new property typically carries over from the relinquished property, adjusting for any additional cash or debt. This “carryover basis” represents the deferred gain that continues into the new investment.
But when you perform a Cost Segregation Study on the replacement property, you must determine how to treat this basis for depreciation purposes:
Carryover Basis Approach: You continue using the depreciation schedule from the old property and only the new investments start a fresh depreciation schedule.
Restart Basis Approach: You treat the entire replacement property as brand new and restart all depreciation schedules.
Each investor’s scenario is different. You must understand carryover basis rules, determine bonus depreciation eligibility, and review exchange documentation to make your decision.
Don’t invite unwanted scrutiny from the IRS. Partner with Scarpello Consulting and we’ll work together to determine what is right for your situation.
