--- title: How Does a 1031 Exchange Work in Conjunction with Depreciation on an Investment Property? description: Does a 1031 defer depreciation recapture taxes or does depreciation continue as if it is the same property? image: https://www.realized1031.com/hubfs/depreciation-1129766236.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # How Does a 1031 Exchange Work in Conjunction with Depreciation on an Investment Property? Posted Aug 2, 2022 ![depreciation-1129766236](https://www.realized1031.com/hs-fs/hubfs/depreciation-1129766236.jpg?width=750&height=392&name=depreciation-1129766236.jpg) Selling an investment property for a gain can result in a large tax bill. Some of that bill may include paying back depreciation. This is called depreciation recapture. The recaptured depreciation is taxed at a different tax rate. Does a 1031 defer depreciation recapture taxes or does depreciation continue as if it is the same property? ### What Is Depreciation (Recapture)? Depreciation decreases net income, which decreases taxes owed. This is a great benefit to real estate investors. Depreciation is a non-cash flow expense since it doesn’t affect an investor’s bank account. However, when the investor sells the property, the IRS will want to recoup some of that depreciation. This is called [depreciation recapture](https://www.realized1031.com/blog/how-is-depreciation-recapture-calculated). Unlike [long-term capital gains](https://www.realized1031.com/blog/what-is-long-term-capital-gains-how-much-is-it-and-how-is-it-taxed), depreciation recapture is taxed at 25% and is independent of the investor’s income level. Even if an investor doesn’t take depreciation while owning a property, taxes are still owed as if the investor took the depreciation. Depreciation affects the cost basis of a property. Let’s say an investor purchases a property and holds it for five years. The cost basis can be calculated as: Purchase price: $400,000 5 years depreciation = $73,000 Cost Basis: $327,000 Sold for $500,000 (gain of $100,000) However, the taxable amount on the sale is $173,000 since depreciation recapture must be factored in.  From the above, depreciation on a residential property can be taken for 27.5 years (or 39 for commercial). This means the annual rate of depreciation is 3.636% per year (1/27.5). We arrive at $72,000 by $400,000 x 3.636% x 5. The $73,000 will be taxed at 25%, while the $100,000 will be taxed at the long-term capital gains rate. ### 1031 Exchange and Depreciation Schedules What happens to depreciation recapture if an investor decides to do a 1031 exchange instead of selling the property outright? In that case, there won’t be any taxes owed as a 1031 exchange will defer those taxes. This includes depreciation recapture taxes. When the investor exchanges into another property, the original non-depreciated cost basis plus the gain in value carries over without the impact of depreciation. Using the previous example, the non-depreciated cost basis is $327,000 + $100,000 = $427,000. The investor isn’t done with depreciation and has two options for how to continue with depreciation on the acquired property. These options are known as single schedule and two schedule depreciation. Single schedule depreciation is common because of its simplicity. In the single depreciation method, the investor uses the new adjusted cost basis and divides it by 27.5 years for residential properties (or 39 years for commercial). The result provides the annual amount to depreciate for the acquired property. The two schedule method, which the IRS prefers, continues the depreciation schedule of the relinquished property while also using the cost basis of that property. From the above example, the relinquished property was held for 5 years, so the remaining depreciation is 22.5 years. A new depreciation schedule is established for the replacement property for the full 27.5 years. The replacement property uses the new cost basis, generally the difference in the value of the acquired property over the relinquished property. The main advantage of the two schedule method is basically double depreciation. The relinquished property’s depreciation carries on until it expires in 22.5 years. This depreciation method will often be far greater than if the single method was used. When one weighs the benefits of the two schedule method against the single schedule method, it will likely be clear that the tax shelter is larger. However, the complexity of calculating depreciation also increases with the single schedule method. This is why working with a real estate account is essential to ensure correct calculations and conclusions of the depreciation schedule choice. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. Download The Guide To 1031 Exchange [![The 1031 Investor's Guidebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-250.png?width=250&height=250&name=1031-Exchange-eBook-250.png "Tackle the art and science of ...") ](https://www.realized1031.com/blog/how-does-a-1031-exchange-work-in-conjunction-with-depreciation-on-an-investment-property#blogform) Download eBook ---   --- ### The 1031 Investor's Guidebook ![Download The Guide To 1031 Exchange](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/1031-Exchange-eBook-550.jpg?width=550&height=650&name=1031-Exchange-eBook-550.jpg) Tackle the art and science of completing your 1031 exchange. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Selling an investment property for a gain can result in a large tax bill. Some of that bill may include paying back depreciation. This is called depreciation recapture. The recaptured depreciation is taxed at a different tax rate. Does a 1031 defer depreciation recapture taxes or does depreciation continue as if it is the same property? What Is Depreciation (Recapture)? Depreciation decreases net income, which decreases taxes owed. This is a great benefit to real estate investors. Depreciation is a non-cash flow expense since it doesn’t affect an investor’s bank account. However, when the investor sells the property, the IRS will want to recoup some of that depreciation. This is called depreciation recapture. Unlike long-term capital gains, depreciation recapture is taxed at 25% and is independent of the investor’s income level. Even if an investor doesn’t take depreciation while owning a property, taxes are still owed as if the investor took the depreciation. Depreciation affects the cost basis of a property. Let’s say an investor purchases a property and holds it for five years. The cost basis can be calculated as: Purchase price: $400,000 5 years depreciation = $73,000 Cost Basis: $327,000 Sold for $500,000 (gain of $100,000) However, the taxable amount on the sale is $173,000 since depreciation recapture must be factored in. From the above, depreciation on a residential property can be taken for 27.5 years (or 39 for commercial). This means the annual rate of depreciation is 3.636% per year (1/27.5). We arrive at $72,000 by $400,000 x 3.636% x 5. The $73,000 will be taxed at 25%, while the $100,000 will be taxed at the long-term capital gains rate. 1031 Exchange and Depreciation Schedules What happens to depreciation recapture if an investor decides to do a 1031 exchange instead of selling the property outright? In that case, there won’t be any taxes owed as a 1031 exchange will defer those taxes. This includes depreciation recapture taxes. When the investor exchanges into another property, the original non-depreciated cost basis plus the gain in value carries over without the impact of depreciation. Using the previous example, the non-depreciated cost basis is $327,000 + $100,000 = $427,000. The investor isn’t done with depreciation and has two options for how to continue with depreciation on the acquired property. These options are known as single schedule and two schedule depreciation. Single schedule depreciation is common because of its simplicity. In the single depreciation method, the investor uses the new adjusted cost basis and divides it by 27.5 years for residential properties (or 39 years for commercial). The result provides the annual amount to depreciate for the acquired property. The two schedule method, which the IRS prefers, continues the depreciation schedule of the relinquished property while also using the cost basis of that property. From the above example, the relinquished property was held for 5 years, so the remaining depreciation is 22.5 years. A new depreciation schedule is established for the replacement property for the full 27.5 years. The replacement property uses the new cost basis, generally the difference in the value of the acquired property over the relinquished property. The main advantage of the two schedule method is basically double depreciation. The relinquished property’s depreciation carries on until it expires in 22.5 years. This depreciation method will often be far greater than if the single method was used. When one weighs the benefits of the two schedule method against the single schedule method, it will likely be clear that the tax shelter is larger. However, the complexity of calculating depreciation also increases with the single schedule method. This is why working with a real estate account is essential to ensure correct calculations and conclusions of the depreciation schedule choice. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status.", "articleSection" : [ "1031 Exchange" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-08-02T12:00:02+0000", "datePublished" : "2022-08-02T12:00:02+0000", "description" : "Does a 1031 defer depreciation recapture taxes or does depreciation continue as if it is the same property?", "headline" : "How Does a 1031 Exchange Work in Conjunction with Depreciation on an Investment Property?", "image" : { "@type" : "ImageObject", "height" : 392, "url" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/depreciation-1129766236.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/how-does-a-1031-exchange-work-in-conjunction-with-depreciation-on-an-investment-property", "name" : "How Does a 1031 Exchange Work in Conjunction with Depreciation on an Investment Property?", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://733513.fs1.hubspotusercontent-na1.net/hubfs/733513/depreciation-1129766236.jpg" } ```