Tax Deferral 1031 Exchanges and Cost Segregation

By: Patrick Oconnor
Tax Deferral 1031 Exchanges and Cost Segregation

Tax deferral through 1031 exchanges, or tax-free exchanges of real estate, have become a popular method of tax deferral of capital gains taxes. Almost by definition, individuals who utilize the 1031 exchange option are reluctant to pay taxes that can legally be avoided. 1031 exchangers have asked if they can receive tax deferrals and enhance depreciation. The short answer is yes.

A complete answer needs to consider the remaining cost basis for the property that has been exchanged. If the remaining cost basis is?minimal then tax deferral is minimal and, it is probably not financially feasible to utilize cost segregation. If the remaining cost basis (plus the amount of additional cash contributed) is at least $500,000, tax deferral is increased and it is worth reviewing whether cost segregation makes sense.

The total value of the new property is proportionally allocated to the remaining cost basis of the 1031 exchange property (and any additional basis from new investment). For example, if the five-year property is 10% of the value of the new property, and the remaining cost basis is $3,000,000, a value of $300,000 ($3,000,000 x 10%) would be allocated to the five-year property.

One interesting issue is whether five-year property in the new property is considered personal property. To gain the tax deferral benefits, a 1031 Exchange must involve like-kind property. For example, if you sell a house and purchase a lake house, boat and jet ski as your exchange property, the boat and jet ski would be considered “boot", taxable as ordinary income and the owner does not receive any tax deferral.

The boat and jet ski are considered “boot" since they are personal property and the property that was sold was real estate.

Since five-year property is referred to as personal property in IRS documentation, there has been confusion regarding this issue. The IRS defers to state law regarding whether items are real property or personal property for the purpose of determining whether there is “boot." Carpet and vinyl tile are both significant five-year life components. While they are considered personal property for depreciation purpose, they are considered real property by state law (in most states). Hence, they are not considered “boot." and the owner can experience tax deferral.

Tax deferral from cost segregation is effective for 1031 exchange purchases provided the remaining cost basis is at least $500,000. Exchange buyers can defer taxes and reduce taxes on the old property and increase depreciation for the new property.

Cost segregation produces tax deferrals and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

  • Baltimore, MD
  • Houston, TX
  • Bridgeport, CT
  • Dallas/Ft. Worth, TX
  • Hartford, CT
  • San Francisco, CA
  • Washington, DC
  • Las Vegas, NV
  • Memphis, TN
  • Tampa, FL
  • Albany, NY
  • St. Louis, MO
  • Tulsa, OK
  • Columbus, OH
  • Santa Rosa, CA
  • Fresno, CA
  • Detroit, MI
  • Ft. Lauderdale, FL
  • Cincinnati, OH
  • Cleveland, OH
  • Scranton, PA
  • Indianapolis, IN
  • Albuquerque, NM
  • Wichita, KS
  • Milwaukee, WI
  • Stockton, CA
  • Little Rock, AR
  • Bakersfield, CA
  • Oklahoma City, OK
  • Nashville, TN
Cost segregation produces tax deductions amd tax deferrals for virtually all property types.

Property Type:
  • Regional mall
  • Truck terminal
  • School
  • Manufacturing/processing
  • Retail
  • Shopping center
  • Cold storage facility
  • Tennis club
  • Country club
  • Medical office
Almost every industry, including the following, can generate cost-efficient tax deductions and tax deferrals by using cost segregation.

  • Arts, Entertainment, and Recreation
  • Laundry facilities
  • Furniture stores
  • Paper manufacturing
  • Machinery manufacturing
  • Metal manufacturing
  • Computer and electronic manufacturing
  • Golf courses and country clubs
  • Textile mills
  • Truck transportation

O’Connor & Associates is a national provider of commercial property real estate consulting services including , ,condemnation appraisals, tax deduction, feasibility studies, market research, property tax, income tax, feasibility studies, casualty loss, taxes, Tips and Tricks for Appealing Your Property Taxes in Fort Bend, Fort bend county appraisal, and Federal tax reduction. Appraisal services are provided for all commercial property types including multi-family housing, retail stores, hospitals, hotels, industrial properties, manufacturing facilities, medical offices, commercial offices, restaurants, self-storage units, shopping malls, shopping plazas and warehouse/distribution centers.


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