I'm aware of bifurcation as a legal term and as a mathematical term, but I don't understand why it would be relevant to a discussion of 1031 exchanges. Maybe you could rephrase the question?
Here is my understanding just need a little bit of clarity. With bifurcation you can legally depreciate the value you of your investment property (the building (3.5%) home improvements (5%), and personal property (20%) annually on your taxes for a tax break. However if this investment property is sold for more than you told the IRS it was worth, they would take a bigger chunk of your profit.
However if you were to do a 1031 exchange, the IRS would not require you to pay this money back right away. Is this true? Is there something that I am not understanding? Does not seem to be illegal. Anyone know more about this? Sounds like a great way to build wealth to me.
There are several articles on 1031 exchanges here on BP: http://www.biggerpockets.com/articles/category/1031-exchange
a google search will also give you plenty of information
Charles Perkins, seems like it is dividing the amounts in two paths, one along what was reported and tax is computed and the other being recognized as a gain. I have only done a few 1031s and never goy into this tax issue. :)
You may be confusing bifurcation with cost segregation.
Let's say you own a multi-unit property (for example a 3-plex). You live in one of the units and use the other two as rentals. After some years of ownership you decide to sell for a fair price. The sale of your property takes place in a single transaction, but the IRS wants you to treat the sale as if you sold two separate properties -- one is your residence unit and the other property is comprised of the rental units. In other words, the IRS wants you to bifurcate the sale of your property and report two separate transactions on your tax return. You can use the provisions of Section 121 to exclude profit on the sale of your primary residence from capital gains taxes, while the sale of the rental units is a taxable event.
During your period of ownership, you decided not to simply depreciate the entire rental property (excluding land) over 27.5 years, but instead you segregated your rental units into different components and allocated your cost (depreciation basis) for the entire property among the 5 year property, the 15 year property and the 27.5 year property. You allocated a protion of your purchase cost to the appliances and depreciated them over 5 years. You allocated a portion of your purchase cost to the landscaping and depreciated that over 15 years, and the balance of cost you allocated to the dwelling structure was depreciated over 27.5 years. Any capital improvements you made to the dwelling structure were depreciated on a separate 27.5 year schedule.
When you sold the property, you decided to defer the capital gains tax on the rental units using a 1031 exchange. The unit that you used as your primary residence can not participate in a 1031 exchange, but since you bifurcated the sale, the rental units can participate in a 1031 exchange.
If this does not answer your question, please ask again.