How do you handle depreciation in a self-directed IRA?

[Christopher Gilbert]

A couple quick questions that hopefully someone has some experience with. I am looking at moving into a self directed IRA to purchase additional rental properties. Usually depreciation is one of the most valuable tax savings effects of rental properties when you ordinarilly own them but how is that handled with a self-directed IRA? If the account is growing tax free already are you still forced to take the depreciation out of your cost basis? If so, it would seem like it would be, in effect, a penalty since you do not get the tax benefits and your cost basis is reduced.

Does your cost basis even matter when you sell a property in your IRA since you are taxed as income when you withdraw from it in the future? Do 1031 exchanges even matter within an IRA?