I have a friend that has about 12 properties they have had for over 27 1/2 years. The properties are completely depreciated out, they are all SFR, and I'd like to be able to give them solid advice. We have already spoke about doing a 1031 exchange with them, but I want to make sure that is something that is good for them. I believe they would be open to that option, but if there are other options, I'd like to hear them.

Tell them to pop a bottle of Champaign and celebrate. The amount of deferred taxes and the resulting earnings on those funds over such a long period should be massive.

Hi @Joshua Schmidt, This is one of the 1031 Exchange strategies that is used often when investment properties have been fully depreciated. The investor can sell their current rental properties that are fully depreciated, structure a 1031 Exchange and acquire one or more replacement properties of GREATER value to complete their 1031 Exchange. Their depreciation does NOT start all over again, but by trading up in value they have acquired additional cost basis that can be depreciated. For example, if their portfolio was valued at $1.0 million and was fully depreciated, they could 1031 Exchange into a portfolio that was worth $2.0 million and by doing this they have traded up by an additional $1.0 million in cost and can now depreciate this additional "cost basis" that was acquired through the 1031 Exchange.

@Joshua Schmidt, 40 is the new 20! What I don't understand is how I've stayed so young when everyone else my age looks really old. Bifocals - beer goggles for old folks!

@Dave Foster lol, mentally, I feel like I'm 20, physically, after 20 years in the Military, I feel like I'm 60! I may need a pair of those biofocals as well....

Dave, I guess the term "a lot younger" can be very subjective. I'm 40, they are in their early-50s at the oldest. I think 1031 could definitely still be a viable option for them for sure. I didn't know about the land separation when it comes to depreciation, thanks for bringing that up and it may be something that helps them out for sure. I'll pass the word on and see if it is something that is viable for them. Thanks again!

I agree Mike, it definitely sounds like a good "problem" to have, lol!

LOL!!! @Jonathan R McLaughlin, As if I didn't feel old enough :).

@Dave Foster we call bifocals “progressives” now Dave...gotta stay with it!

What do they want to do with their lives? Sometimes buying more properties is not the answer since it'll take more time out than now. Do they have heirs/assigns they want to take care of? Do they have non-RE (yes they do exist) dreams they can make happen? Do they like the properties and just need tax shelter? - Cash-out re-fis best way to get cash without a taxable event. Do they want out of the hassle but don't want to pay taxes, then 1031 into some kind of syndication.

Rentals Depreciated Out...now what?Rentals Depreciated Out...now what?

@Joshua Schmidt, Kudo's for paying it forward with your friend! You mentioned you're "a lot younger". As mentioned previously this is really what the 1031 is built for - to take highly depreciated properties and add depreciable basis through the acquisition of more and more expensive properties to keep the tax at bay and provide additional depreciation.

But when the investor gets to a certain place in life that option of expansion isn't nearly as appealing as it might be if they were younger. So the strategy of continuing to defer the tax with 1031s but not adding depreciable basis in the form of purchasing more becomes attractive as well as simplifying and moving from active to passive investing.

I'd also take a close look at those properties they are selling. One thing most people forget or don't know is that the basis of those properties is not "0". Depreciation only applies to actual construction and not land value. It is possible that the depreciation on those properties actually is a small fraction of the actual value. This would shift the actual depreciation recapture amount.

We had a Key West client with a rental trailer on the water (it's always that stuff that survives the hurricanes). He was concerned because he had depreciated it out. But the reality is that he had been depreciating $20K worth of trailer on a $200K lot. That's still a tax hit. But not nearly as much as he feared.

Rentals Depreciated Out...now what?

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