Self storage- 1031 versus Rolling year 1 100% depreciation?

Question

Tax accountants.  Yahoo.  Most of your work is done.

Looking at selling one self storage location. Just took year 1 Depreciation 100% on part of it. I will do the same on the next location we are going to build so should be a swap, if not larger write off.

Or if I did a 1031 into an existing Storage locations.

Numbers wise does it matter which of the above or any business concerns?  Thanks.

Dave Foster · Answer

@Henry Clark, maybe.  Maybe not.  You're talking about a 1031 vs a lazy 1031.  At first glance they work the same - You either defer the depreciation recapture in the 1031.  Or you pay that depreciation recapture when you sell.  But get new bonus depreciation when you purchase.

Here' are a couple of thoughts

1. In order for the lazy 1031 to work the purchase and cost seg has to be in the same year.  Otherwise you'll be paying the tax in one year.  And maybe getting a big write off (that could be suspended) in the next year.

2.Depending on your income/status (rep etc) you may not get to use all of your new depreciation.

3. If it's all the same then why not do a 1031 (or at least attempt it - nothing says you have to follow through).  That way you also get to defer all gain and all depreciation.  And if you purchase more than you sell you get to add that to your depreciable basis.

Jason Malabute · Answer

Hey Henry, the choice really comes down to deferral versus acceleration. A 1031 cleanly defers both the gain and the depreciation recapture, which keeps more capital working but pushes the tax bill out to a later sale. Rolling into a new project and stacking fresh bonus depreciation can knock out a big chunk of that gain in the same year — but it's not always a clean match, especially since self-storage typically throws off heavy recapture sitting at higher rates, and the lazy-1031 only works if the purchase and the cost seg both land in the same tax year. If your next project will have enough basis and qualifies for bonus, you may be able to neutralize most of the gain without doing an exchange while keeping more flexibility. If the numbers don't quite get you there, the 1031 is the cleaner way to fully defer. The exact answer really depends on your projected income and hold strategy, so I'd model both side by side with your own CPA before pulling the trigger.

Basit Siddiqi · Answer

Are you asking us to compare the following scenarios?Sell Property ABC without a 1031 Exchange, acquire property DEF, do a cost segregation studyvsSell property ABC with a 1031 Exchange, acquire Property DEF, do a cost segregation study?There is definitely a difference, I would most likely do option 1.

Henry Clark · Answer

Correct.  Thanks.

Ashish Acharya · Answer

Hey Henry,

Piggy backing off of David, it does matter, because you’re comparing deferral versus acceleration. A 1031 lets you defer both the gain and depreciation recapture, which keeps more capital working but pushes the tax bill down the road. Rolling into another deal with fresh bonus depreciation can offset some or even most of the gain, but it’s not always a perfect match, especially with recapture sitting at higher rates.

With self-storage, since you’re likely taking significant accelerated depreciation, the recapture component becomes a big factor. If the next project has enough basis and qualifies for bonus or cost seg, you may be able to neutralize a good portion of the gain without doing a 1031, while still maintaining flexibility. If not, the 1031 is the cleaner way to fully defer.

It really comes down to whether you want flexibility and potential step-up in future deals, or full deferral today with stricter rules. Running both scenarios side by side usually makes the answer clear based on your projected income and hold strategy.

Happy to connect!

Henry Clark · Answer

Thanks folks.  We are going to build our next set of Storage units.  Take the year one.  Then decide if we sale the existing location in the same year or dont sale it.

Can’t do the 1031 since we will be developing.

Henry Clark · Answer

@Dave Foster.  Thanks Dave.  May either Develop a new place versus purchase.  If we develop then no 1031 and would do the year one again to offset.  Obviously if we buy then could do a 1031.  Actually the deal to develop fell thru.  Chose not to make a deal on the land.

Will switch to possibly developing on land we already own.

Self storage- 1031 versus Rolling year 1 100% depreciation?

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