Question about depreciation.

[Account Closed]

When you sell a property and do a 1031 exchange to defer the capital gains, does the new property you buy restart the entire 27.5 year cycle all over again?

I know the capital gains follows you but can you continue to take depreciation with every property that you exchange for?

Thanks BP!

[Dave Toelkes]

You did not get a complete answer to your question. The answer is yes, and no. The adjusted basis in the relinquished property becomes your initial basis in the new property and this OLD BASIS is depreciated on the remainder of the depreciation schedule you had in the relinquished property.

Any new money you had to add to the transaction to complete the replacement property acquisition is added to your basis in the property. Let's call this amount of new money your NEW BASIS. The portion of your NEW BASIS that is not allocated to the replacement property land, is depreciated on a new 27.5 year schedule.

Maybe an example will help.

Let's say your relinquished property had an adjusted depreciation basis of $30K and 12 years left on the depreciation schedule. You sold the property for $75K and 1031 exchanged into a $135K replacement property. To complete the transaction you brought $60K in additional cash and debt to the settlement table.

Let's allocate 25% of the cost of the replacement property to the land and the rest to the dwelling structure. This means that 25% of the $60K you brought to the settlement, or $15K, is allocated to the land which leaves $45K additional cash/debt to be applied to the depreciation basis of the dwelling structure.

Your OLD BASIS of $30K is carried over to the replacement property and is depreciated over the remainder of the 12 years you had left on the old depreciation schedule. The $45K in NEW BASIS in the replacement property is depreciated on a separate 27.5 year schedule.

Hope this helpss.