1031 exchange into DST with a cost segregation study

Forum|Forum|1 year ago
October 12, 2024
3 replies
25 views

So, I had a client sell a rental property and 1031 exchanged into 4 DSTs. The original property had a depreciable basis of $310K and $120K of that had been taken by the time of the 1031 exchange. The leftover $190K basis I have prorated ($65K, $25K, $62K, and $38K) for each property according to the % of the purchase price listed by the 1031 exchange company. My understanding is that I'm supposed to continue the depreciation schedule. However, 2 of the DSTs have provided a cost segregation study and 2 did not. Can I just continue the straight line depreciation on all 4 DSTs? Do I have to use the cost segregations studies when they are provided or can I ignore them? If I can continue the straight line depreciation from the relinquished property, what year am I starting from? The relinquished property had 16 years of depreciation left.

I greatly appreciate your time and advice!

ProSeries Professional

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TaxGuyBill

Level 15

@gsa11 wrote:

The leftover $190K basis I have prorated ($65K, $25K, $62K, and $38K) for each property

Wouldn't the Cost Seg items be coming out of those amounts?

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gsa11Author

Level 3

My question was more about do you have to use the cost seg studies when they are provided or is it optional?

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strongsilence

Level 10

Cost seg studies are done to accelerate depreciation. They are advantageous to taxpayers. I would not want to use my own method.

Depreciation starts on the date the DST was purchased.

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gsa11Author

Level 3

I would say that they CAN be advantageous depending on the individual taxpayer's numbers.

For the DSTs that didn't provide anything then I am restarting the depreciation over 27.5 years (or 39 because I think one of them is commercial storage unit place), correct?

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TaxGuyBill

Level 15

In most cases, you don't want to make the election to restart depreciation. In most cases you'll want to continue to depreciate the carryover Basis from the previous property (using the old placed in service date), then add a second asset to depreciate the 'extra' amount paid (using the new placed in service date).

You don't NEED to use the Cost Seg, but it can often be beneficial and your client paid for it, so why would you not want to use it?

dascpa

Level 11

There is a potential IRS issue that has not been addressed [definitively] with 1031's and cost segregation studies. The goal of the cost seg is to apportion as much to quicker depreciation items like 5 and 7 year property. But 1031's are only allowed for real estate exchanges. 5 and 7 year property is not real estate but tangible personal property in most cases. If that's the case, do these categories still qualify as a real estate 1031? This came from a 1031 class I took. The instructor felt that it was part of the real estate so it should qualify but also noted the IRS could rule otherwise under audit. Makes you wonder.......

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TaxGuyBill

Level 15

@dascpa wrote:

If that's the case, do these categories still qualify as a real estate 1031?

I agree the that if that was part of the deferred amount it would be questionable. However, in my opinion the 'extra' amount paid (non-deferred amount) should qualify for Cost Seg.

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