It is that time of year again when The Center for Wealth & Legacy Studies' Advisory Team fields many questions regarding the reporting and tax treatment of 1031 Exchanges, or in many cases the lack of a 1031 Exchange, on the taxpayers' income tax returns.

There are more questions this year because many taxpayers sold real estate and cashed out rather than deferring their taxes via a 1031 Exchanging again.  They now have significant income tax liabilities to worry about.

Depreciation Recapture Issue

The one tax planning issue in terms of rental or investment property that is most often misunderstood by taxpayers is that of depreciation recapture.  Depreciation, or writing off the cost of a building, is mandatory if a taxpayer buys and holds rental or investment property. 

The depreciation is indefinitely deferred into the future upon sale of the investment property as long as the taxpayer structures a 1031 Exchange transaction.  However, the depreciation will be recaptured and taxed upon the sale if the taxpayer does not 1031 Exchange into replacement property.

This is the reason that we have noticed an increase in depreciation recapture questions.  So, I thought that I would link to a discussion board post on depreciation recapture that will help explain the issue in greater detail.