1031 Depreciation

[Joseph S.]

I think this is a basic question about how depreciation works in a 1031 exchange and I think the easiest way to ask is through an example:

I buy house A for $200k, over the course of 5 years depreciate $50k of it, and then sell house A for $275k in a 1031 exchange for house B which I buy for $500k. Can I depreciate the full value of house B ($500k - land value) or does the $50k I depreciated from house A carry over and only allow me to depreciate $450k - land value over time?

[Dave Foster]

@Joseph S., If you convert to a primary residence then after you have owned it for 5 years (a specific requirement if the property has previously been part of a 1031 exchange) and lived in it for 2 out of the previous 5 years you can sell and take a prorated share of the sec 121 exclusion gain.  The gain will be prorated between investment and primary use.  So you get some of the gain tax free.  You do have to recapture depreciation.

If you die while owning the property your heirs get a "step up" in basis so it becomes as if they paid FMV for it as of the day you die. So yes the basis and depreciation recapture start over.

Both are great long term strategies to discuss and implement with you tax advisor.