Depreciation "Basis" on 1031 Exchanges

[Max D.]

Hi All,

This is a question for the CPAs and tax experts out there. How does one figure out the basis ("depreciable value") on a multifamily 1031 exchange if the investor has run out of depreciation on their current asset? I understand that the depreciable amount (basis) of the replacement property is the price paid minus the adjusted gain realized from the sale; (whereby the adjusted gain on sale is the sales price less any debt, less any depreciation already taken, and less any selling expenses). But, if a multifamily investor completes a 1031 exchange and has owned the current property (the property they sell) for more than 27.5 years (and is therefore "out" of depreciation and the building is paid off), is the adjusted gain simply the total value of the current property, less selling expenses? And is therefore the basis for the replacement property simply the price paid minus the net equity used in the exchange?

Example:

Investor sells $3.2M apartment building (no debt and is "out" of depreciation since they have owned for more than 27.5 years).

Sales price = $3.2M

-Selling expenses of $200K

=Net equity to exchange = $3M

Purchases replacement property = $5M

Therefore, is the adjusted (depreciable) basis on the replacement property simply $5M - $3M = $2M? 

Therefore, can said investor depreciate $2M worth of the new asset?

Thanks for the help!