Recaptured Depreciation In A 1031 Exchange

Investor interest in 1031 exchanges has never been higher, and with good reason. This piece of IRS tax code allows you to change the form of your investment without triggering any immediate tax consequences if you properly structure your exchange. This allows a savvy investor to grow his or her portfolio in a very tax favorable environment.

There is, however, one special rule that catches investors off guard when they are planning their exchange – recaptured depreciation.

Special rules apply when depreciable property is involved in an exchange. The general rule is that if you exchange like-kind depreciable assets (one building for another building or one piece of equipment for another piece of equipment), depreciation recapture can be avoided. However, if your exchange involves trading improved land with a building for unimproved, empty land then any depreciation you claimed on the building will be recaptured and taxed to you as ordinary income.

When considering your next 1031 exchange, it is important to calculate any recaptured depreciation into the equation.

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