A 1031 exchange and a cost segregation study are valuable tax strategies real estate investors use. Still, they have different implications and can interact in a few ways. Here’s how a 1031 exchange can impact a cost segregation study:
1031 Exchange Basics: A 1031 exchange allows real estate investors to defer capital gains taxes when they sell a property and reinvest the proceeds in another like-kind property. The IRS provides specific rules and timelines for executing a 1031 exchange, including requiring the replacement property equal or greater than the relinquished property.
Can you do a cost segregation with a 1031?
Apartment Complex With 1031 Exchange
Featured Case Study
About This Study
Many of our clients utilize multiple tax strategies to maximize tax benefits for their investment properties. In this case, our client utilized both a 1031 exchange to defer tax gains, along with a cost segregation study to minimize the remaining tax burden.
Overall, the client was able to defer about $50 million in gains and accelerate $21 million of the replacement property. When both strategies are utilized correctly by seasoned professionals, a substantial positive outcome is achieved. These strategies require a deep understanding of the tax laws and regulations, and our team of experts is dedicated to helping clients navigate the complex world of real estate taxation, delivering comprehensive solutions that not only protect and grow our client’s investments but also contribute to their overall financial goals.
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Features
This apartment complex is situated in Denver, Colorado, and spans across 25 acres of land, offering a total of 250 units.
Pre 1031 Exchange Basis:
Building: $90 Million
Land: $10 Million
Post 1031 Exchange Reduced Basis:
Building: $45 Million
Land: $5 Million
Total Costs Tied to Study $58 M
Total Costs Tied to Study $58 M
Total Segregated Costs 35%
Accelerated Depreciation of $21 M
1031 exchange and a cost segregation study are two distinct tax strategies that can potentially interact in real estate transactions. When a 1031 exchange is combined with a cost segregation study, it can further enhance tax benefits by accelerating depreciation deductions on the acquired property. When executed strategically and in consultation with tax professionals, they can help real estate investors defer taxes, enhance cash flow, and optimize their returns on investment. However, due to their complexity, planning these strategies carefully is crucial to ensure they align with your specific objectives and comply with IRS regulations. For more information on how a 1031 will relate to your cost segregation study and how we can tailor your project to your specific needs, please reach out to our dedicated team.
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Case Study
Flex Warehouse in Salt Lake City, Utah
First Year Increased Depreciation: $700,000
- Facility: Flex Space Warehouse
- Location: Salt Lake City, Utah
- Size: 50,000 SF
- Property: 3.6 Acres
- Building Basis: $3.4M
- First Year Increased Depreciation: $700,000
