Liberal Depreciation Guidelines
for 1031 Exchange Property!

                                                   By Mary Lou Schwab CPA

The IRS came out with Notice 2000-4, which allows for liberal depreciation for real estate property acquired in exchange for like-kind property under Section 1031. An exchanger now can report more depreciation expense? Notice 2000-4 defining the IRS’ method yields a faster cost recovery than would be available if the 1031 replacement property was depreciated as newly purchased property. This notice must be followed for any like kind exchange after January 2, 2000. The IRS says it plans to issue regulations on this subject, but tells taxpayers to use the notice for guidance until then.

For real property originally acquired after 1986, the depreciation method for IRS tax purposes is called the Modified Accelerated Cost Recovery System (MACRS). Residential real property is depreciated over 27.5 years and nonresidential real property is depreciated over 39 years.

In essence, Notice 2000-4 treats a taxpayer who has participated in a 1031 exchange as if it owns two properties for depreciation purposes. The first property is the old relinquished property, which the exchange continues to write off as if the like kind exchange never took place. The second property is the new replacement property costing an amount equal to the basis in that property less the adjusted basis in the old relinquished property. This amount is depreciated over the property’s usual recovery period (27.5 or 39 years).

Where the old relinquished property’s basis has not been depreciated down to zero, the new IRS method yields a faster recovery period compared to an outright new purchase or real estate that was not part of a like kind exchange.

©2004 Bankers Escrow Corp. Mary Lou Schwab CPA is Vice President of Bankers Escrow Corporation and oversees the 1031 Exchange Division. She has over 22 years experience in real estate taxation. For questions on 1031 exchanges call 303-986-4848 or 800-571-6595. Bankers Escrow Corporation provides qualified intermediary services for all types of exchanges including simple deferred, reverse, construction, leasehold interest and business property exchanges.