Cost Seg (Before a 1031 Exchange)

[Jon Ful]

Friends,

2022: We purchased, rehabbed and rented a property in 2022.

2023: We plan to 1031 exchange this subject property this year (2023) into another rental that will also be a value add.

Question is: Do the cost seg for 2022 (or) skip the 2022 cost seg and instead do a 2023 cost seg on the exchange property?

Please explain how you think through the issue.

[Jeff Nash]

You have to consider a number of factors: 

1) Have you done a preliminary analysis of what the anticipated gain would be comparing the estimated sales price with your adjusted basis? Were those rehab costs capitalized or expensed? What was the nature of those costs?

2) is your tax situation expected to change, all things equal, in 2022 versus 2023?  

3) There is technically no specific holding period requirement and intent is what matters, but I would suggest you get to a long-term holding period (greater than a year) based on the in-service date when it was available and ready for use (actively marketed for rent).

4) What do you expect to replace this property with and how much will you be exchanging up for?  Will it be in the same area where your basis allocation is going to be about the same - - say building and land have a 80/20 split, so would that change much or not? 

5) Consideration would need to be given to the fact that bonus depreciation decreases from 100% to 80% from 2022 to 2023.

6) Are you a real estate professional and/or is the next property going to be used as a short-term rental?

So basically you need to work with both a tax advisor, cost segregation specialist, and 1031 QI as a team and see what makes the most sense.  There are plenty of resources on here that you can look to.