Two of the Most Powerful Tools in Real Estate Tax Law —
Used Together Correctly.
Used in the right sequence, cost segregation and a 1031 exchange can eliminate depreciation recapture, defer capital gains, and accelerate new deductions simultaneously. Used in the wrong sequence, they can create unexpected tax liability. This page covers both — without the marketing.
Do the Cost Segregation Study Before or After the 1031 Exchange?
In a 1031 exchange, depreciation recapture is deferred — not triggered — as long as the exchange is properly structured. The recapture carries over to the replacement property. It only becomes taxable when you eventually sell without doing another exchange.
The real question CPAs debate is timing — specifically whether to commission the cost segregation study on the relinquished property before the exchange, or on the replacement property after.
The correct answer for most investors: Commission the study on the replacement property after the exchange closes.This generates new accelerated deductions on the new asset without accelerating recapture on the property you just sold.
Exchange the Building. Study the Replacement. Stack the Benefits.
Identify Relinquished Property
List the property for sale. Do not commission a cost segregation study at this stage if a 1031 exchange is planned — unless your CPA confirms the recapture math favors it.
Complete the 1031 Exchange
Identify replacement property within 45 days. Close within 180 days through a qualified intermediary. Capital gains — including future recapture on §1250 property — are deferred.
Commission Cost Seg + Elect 100% Bonus
Immediately after closing on the replacement building, our team performs the component-by-component analysis. Your CPA applies the 100% bonus depreciation election — the entire reclassified amount is deducted in year one of the replacement property.
Maximum Benefit From Both Tools
Capital gains deferred from the exchange. New depreciation generated on the replacement. Net tax position: significantly improved. This is the strategy that maximizes both tools simultaneously.
Line 25 Is Where the Cost Segregation Interaction Lives.
Form 8824 is the IRS form used to report a like-kind exchange. Line 25 requires reporting of ordinary income recognized under §1245 or §1250 (depreciation recapture). If a cost segregation study was performed before the exchange, the accelerated depreciation taken on personal property (5-year, IRC §1245 property) is recaptured here as ordinary income — regardless of the exchange.
Recaptured as ordinary income. NOT deferred in a 1031 exchange. Taxable even inside the exchange.
25% unrecaptured Section 1250 gain. CAN be deferred in a 1031 exchange.
Long-term capital gains rate. Fully deferred in a 1031 exchange.
Two Tools. Used Together. Maximum Benefit.
Our team will walk through your specific situation — the exchange, the replacement property, and what cost segregation finds on it. Free. 24-hour response. If we cannot find more in deductions than our fee — you owe us nothing.