1031 Exchange Depreciation Recapture

Multifamily investors use depreciation to reduce taxable income during ownership. Residential rental property is depreciated over 27.5 years on a straight-line basis. When you sell, the IRS "recaptures" that depreciation at a 25% rate — on top of any capital gains tax owed.

Example

Purchase price: $2,000,000 · Depreciable basis (building only): $1,600,000 · Years held: 10 · Depreciation taken: ~$582,000 · Recapture tax at 25%: ~$145,500

How a 1031 Exchange Helps

When you execute a properly structured 1031 exchange, both the capital gains tax AND the depreciation recapture tax are deferred to the replacement property. The adjusted basis carries over, preserving the deferral until the replacement property is eventually sold (or another 1031 is executed).

Bonus Depreciation and Cost Segregation

Investors who have taken accelerated depreciation via bonus depreciation or cost segregation studies have larger recapture exposure — making a 1031 even more valuable at disposition.

Consult your CPA and contact TMG to plan your exit strategy well before going to market.