Cost Segregation After a 1031 Exchange Starts With the Exchange Basis
Keep carryover basis, excess basis and separately purchased furnishings distinct on a replacement rental.
About this planning example
Anonymized composite planning example informed by recurring discovery-call themes. Facts are generalized to protect privacy. This is educational analysis, not a testimonial or a report of completed client work, verified savings or investment results.
The situation
A rental investor replaces a long-held property through a 1031 exchange and plans to operate the replacement as a short-term rental. The owner asks for a cost segregation estimate based on the new contract price, including furniture acquired around closing. The prior property’s accumulated depreciation has not yet been supplied to the study team.
The decision
The engineer and return preparer need the same starting numbers. A new purchase agreement does not erase the old property’s depreciation history. Before deciding which components may receive accelerated treatment, the team must explain how the exchange moved basis into the replacement asset and which costs represent additional investment.
Tax rule to verify
Like-kind exchange property generally requires separate consideration of carryover and excess basis for depreciation. The replacement property’s market price is not automatically an entirely new depreciable basis. Special elections and asset-level facts can affect the calculation.
Our recommendation
Have the preparer complete an exchange-basis bridge before finalizing the study. Give the engineer the prior depreciation schedule, exchange workpapers and replacement closing statement. Identify furnishings purchased separately and avoid counting them again inside a building allocation. Reconcile the final engineering schedule to the return’s fixed-asset ledger.
Records needed before implementation
- Form 8824 and qualified-intermediary closing package
- Relinquished-property adjusted basis and depreciation detail
- Replacement settlement statement, allocation support and furnishing invoices
What could change the recommendation
If exchange reporting is incomplete, commission a preliminary scope review rather than a final savings claim. If the replacement property has mixed personal use or an uncertain operating plan, resolve those questions alongside basis. A sound study can still be useful, but its tax value depends on the return treatment and the investor’s ability to use resulting deductions.
The planning deliverable
An agreed basis bridge and a study-to-return reconciliation. This case makes no claim that the full purchase price qualifies for accelerated depreciation or that an exchange creates a guaranteed wage offset.
Source and further reading
IRS Publication 946: How To Depreciate Property
Reviewed October 19, 2026. Apply the rules for the relevant tax year with your preparer; state treatment may differ.
Related Reading
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