Land is not depreciable from a tax perspective. You can’t take tax deductions on the theoretical wear and tear of dirt. A commercial office building, on the other hand, is depreciable. You will recoup your outlay for a commercial building slowly over the course of years or decades. That slow, straight line depreciation is typically called 1250 depreciation – as deductions are taken you have a corresponding decrease in your basis. At the end of the depreciation period your basis will be whittled down to zero.
Some fixtures that exist on your property (such as floor coverings, electrical components, and other things) can be depreciated at a more rapid rate but they generate 1245 gain because they push down your basis.
In a 1031 exchange, you’re not only doing a like-kind exchange of real estate for real estate. If your property has the added complication of 1245 gain, you have to make sure that your replacement property has enough 1245 components to match up with the sale.
Unless you’re careful in your allocations, you can have very little 1250 gain from the sale of the land itself and a whole lot of 1245 gain from the sale of the more rapidly depreciating assets.
To avoid this situation, consider exchanging into property types that are inherently rich in 1245 assets like facilities that have a lot of electrical components or specialty agricultural buildings.
Realize the Tax-Saving Power of a 1031 Exchange
Section 1031 of the Internal Revenue Code offers powerful tax-savings to taxpayers who own investment real estate. Contact the qualified intermediaries at CPEC1031, LLC today to learn more about the awesome power of like-kind exchanges and see if your property is a good candidate for 1031 treatment. We have been guiding taxpayers through the 1031 exchange process for decades. You can trust us to help you through the entire like-kind exchange process from start to finish.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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