Hi, I have a short term rental that I did a cost segregation study on allowing me to depreciate 5yr personal property, 15yr Land Improvements, 39yr real property. If down the road I decided I want to 1031 exchange this property will the 5 and 15yr assets be allowed to be included in 1031 exchange? Or will those be subject to recapture?
The rule is you can only Section 1031 real property which you probably know about and is the insight triggering your question.
But you can still use Section 1031 exchanges even if you've cost segregated. Have your tax advisor explain the details but de minimis amounts of personal property (appliances) get ignored. Also even if the cost segregation consultant treats something as personal property for purposes of his or her study, if local law treats that item as real property you can still include in the Section 1031 exchange.
Adding to @Stephen Nelson's response above, Personal Property which is incidental to replacement Real Property is disregarded, typically, when transferred together with Real Property. Personal and Real Property are defined at the State level. There is a 15% pass through de minimis exemption (no recapture) for a building's Section 1245 Personal Property if the Fair Market Value (FMV) of Personal Property is less than 15% of the new building's FMV. If FMV of Personal Property is more than 15% of the new building's FMV, it is all recaptured. Disclaimer: This does not constitute tax advice. Consult with a licensed tax practitioner.