Cost segregation analysis and 1031 exchanges - need help

[Annie Balagot]

We did a 1031 exchange (our 2nd) and sold a $900k condo and bought 2 single family homes ($660k & $490k) totaling around $1.2M. the original basis of the relinquished property was pretty low. I want to do a cost seg on the $660k home as it is a short term rental and we materially participate so want to take advantage of the STR loophole however, now i'm being told that the cost seg will be based off the tax basis of the relinquished property, not the market value of the new property. is that correct? Then it may not be worth doing at all... anyone else have experience with this?

[Jeff Nash]

The basis of the replacement properties are calculated by reducing their cost by the deferred gain on the relinquished property. 

I would work with your tax professional to determine the impact on your situation and evaluate the cost/benefit as it can get a little complicated, especially considering you need to adopt a reasonable cost allocation method.

Another consideration is that you can either keep the original relinquished property on the books and continue to depreciate it over its remaining life, but then record the extra cost as an additional group of assets (since you have 2); on the other hand, you can make a technical election to just record one replacement property (2 in your case).