Balancing 1245 Rapid Depreciation in a 1031 Exchange

The IRS is changing the way it looks at personal property that’s embedded in real property in 1031 exchanges. For a long time (roughly three decades), the IRS took the position that if the state of Minnesota considers the water heater that’s plumbed in as a permanent fixture and a component of the real estate, then they would go along with that and conform to the state standard.

Recently, some new treasury regulations were released defining what exactly constitutes real estate for purposes of 1031 exchange. Generally speaking, fixtures are still considered components of the real estate and can be 1031 exchanged for other real estate. That said, there can be some exceptions when it comes to things like specialty HVACs or water heaters that are for a special use over and above the standard infrastructure of the building.

1245 Rapid Depreciation

Some people engage in cost-seg studies where they parse out the various components for accelerated depreciation, creating what we call 1245 gain. You need to be cautious in those situations and make sure that your replacement property has a sufficient amount of 1245 components so you can match up your 1245 gains with 1245 replacement.

Assemble Your Team of Advisors

We always recommend surrounding yourself with the best and brightest advisors. Bring in your accountant, attorney, qualified intermediary, and banker in early on during the process to ensure you’re setting yourself up for success. Reach out to the like-kind exchange professionals at CPEC1031 today to learn more about our services and how we can help you execute a successful 1031 exchange.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Dealing with 1245 Property in a 1031 Exchange

Recently I put on a 1031 continuing education class in Rochester, MN that was sponsored by Capstone Financial. One of the participants in the class asked some interesting questions that I  want to expand on in this article.

1245 Property

Here was the participant's question:

"How do you deal with accelerated depreciation that is taken on the relinquished property from a cost segregation study or from other components for example that might be on a farm - what we would call 1245 property?"

If there is a significant amount of 1245 property, you need to work with your tax adviser to make sure that you have, on the replacement side, components that are 1250 property to satisfy your traditional 1031 exchange. But you may also have to acquire components of the replacement property that match up with the old 1245 that you had on the relinquished property.

A Farm Example

So in the context of a farm, there may be pig pens, sheds, silos, and other items that are 1245 property. You may need to make sure that you're buying a replacement property that has similar 1245 components like fiber optic cabling, for example.

• Start Your 1031 Exchange: If you have questions about exchanges of 1245 property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved