Exchanges and Excess Depreciation

[Kyle K.]

I was reading an old BP article posted by Jeff Brown regarding the use of excess depreciation and how it could be used in replacement of 1031 exchanges: http://www.biggerpockets.com/renewsblog/2010/01/05/150k-year-excellent-strategy/ In it, Jeff mentioned something that I was hoping someone could elaborate on, as I think it is a critical point. He said:

I have two questions:
1. Why exactly does this significantly reduce your annual depreciation?
2. In the event you have excess depreciation, is there ever a time you HAVE to use it to offset capital gains, or can you use it to offset capital gains whenever you choose?

[Account Closed]

I have two questions:
1. Why exactly does this significantly reduce your annual depreciation?
2. In the event you have excess depreciation, is there ever a time you HAVE to use it to offset capital gains, or can you use it to offset capital gains whenever you choose?

1) The new property purchased through an exchange will have have a reduced basis based on the basis of the property exchanged and any boot paid. This means that the depreciation will be less because you start out with a lower basis than if you purchased the property outright.

2)Technically you are not talking about excess depreciation. Depreciation just happens to be one of the biggest expenses. An investor might be limited in any given year to how much they can claim in losses from real estate because of income as Steve mentioned above.

You are able to use the passive loss carry forwards in years that your situation allows it or in full when you dispose of the property.