What Do Hotels, Gas Stations, Boats & Artwork All Have In Common?



Real Estate Exchanges are the “flagship” of the IRC 1031 practice, and certainly the more well known of the tax deferred exchange structures. However, a great many business investment transactions are solely personal property transfers or have a personal property component attached. Avoidance of depreciation recapture is often the reason for structuring a personal property exchange, and many do not realize that taxable gains on these properties can be deferred.

Advisors and investors should be aware that even though an asset’s value at sale may be less than its original price, such that there is no gain from appreciation, there may still be a taxable gain if the tax basis is less than the fair market value of the asset. This situation routinely occurs with depreciable business use assets. Ordinary income tax on the gain subject to personal property depreciation recapture can be substantial (upwards of 35%).

Has a cost segregation study been done on real estate being sold? This is a beneficial tool that permits greater depreciation deductions on real estate improvements. However, the presence of cost segregation should sound the alarm that a sale of that property will likely trigger a larger than usual amount of recapture. The good news is that recapture gain, just like capital gain, can be deferred with a 1031 Exchange!


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