Tax Deferral 1031 Exchanges and Cost Segregation
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
Read More...History of Cost Segregation
Cost segregation evolved as the result of multiple court cases and IRS rulings. The body of knowledge is summarized in the Audit Techniques Guide (ATG), published by the IRS. Component depreciation was a prior methodology that produced similar results via separating a building into components. These components often included the roof, plumbing, electrical and elevators. There were concerns some investors were using component depreciation in an abusive manner. As a result of the tax law changes in 1986, tax rates were lowered substantially but many tax reduction techniques (such as component depreciation) were eliminated. From 1987 to 1996, there was a limited ability to depreciate any portion of a real estate separately. Some owners and tax practitioners experimented with assertions that portions of the cost basis were personal property (Section 1245) and not real estate (Section 1250). The case for differentiating between personal property and real estate was HCA (Hospital Corporation of America). After this case was determined in 1996, the IRS decided not to appeal it. Depreciating real estate offered more potential for tax deductions and tax reductions. The following is a summary of some of the items prescribed and the depreciable life in years: Vinyl Tile
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