Depreciation, a tool to potentially lower your taxable income from investment real estate, refers to the "useful life" of real estate. Residential rental property generally has a 27.5-year depreciation schedule while commercial property is generally considered to have 39 years. So what happens if you have owned your investment property for many years and you have run out your full depreciation on your income property?
A possible solution for gaining a new depreciation schedule from a fully depreciated asset and thereby potentially reducing your taxable income, would be to do a 1031-exchange. However, simply conducting a 1031-exchange is not sufficient by itself; the 1031-exchange would require that the newly acquired property be of greater value than the relinquished property. For example, if you sell a $500,000 property that's been fully depreciated, and you acquire another property for $500,000, you would not gain a new depreciation schedule because the prior cost basis would transfer to the newly acquired property. However, if you bought another property for $1,000,000 after selling your $500,000 property, then you have increased your cost basis and therefore can depreciate this newly acquired additional cost.
Delaware Statutory Trusts (DSTs) can potentially be a great solution for those looking to do a 1031 exchange and would like to "trade up" their cost basis and depreciation schedule. At Perch Wealth, we can offer accredited investors DSTs that include pre-existing, non-recourse, financing that can possibly allow them to plan on how they want to structure their exchange and potentially find a way to legally shelter more of their income by increasing their cost basis. We can also offer debt-free DSTs that can be included as part of a diversified investment portfolio, or if investors simply want to remain debt-free on their real estate investments.
Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
1031 Risk Disclosure:
- * There is no guarantee that any strategy will be successful or achieve investment objectives;
- * Potential for property value loss - All real estate investments have the potential to lose value during the life of the investments;
- * Change of tax status - The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- * Potential for foreclosure - All financed real estate investments have potential for foreclosure;
- * Illiquidity - Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- * Reduction or Elimination of Monthly Cash Flow Distributions - Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- * Impact of fees/expenses - Costs associated with the transaction may impact investors' returns and may outweigh the tax benefits