Debbie was a seasoned real estate investor with years of experience under her belt. In 2022, she completed a 1031 exchange, replacing a single-family rental property with two Delaware Statutory Trusts (DSTs). Her tax professional assured her that everything was reported correctly, and Debbie was relieved to avoid a hefty tax bill on the sale.
However, like many tax preparers,, Debbie’s preparer wasn’t fully aware of the nuances behind depreciation and how it could impact her bottom line. What seemed like a smooth transaction on the surface turned out to be a costly oversight—until she reached out for a second opinion.
The Hidden Opportunity
Debbie approached us for a routine review of her tax returns. At first glance, everything seemed in order. The exchange had been correctly reported, and her tax professional had diligently documented all the necessary details.
But as we dug deeper, something stood out: the depreciation schedule assigned over two-thirds of the property’s total value to land. Since land isn’t eligible for depreciation, this meant Debbie was missing out on significant tax deductions—year after year.
A Closer Look
Depreciation is one of the most powerful tools in a real estate investor’s arsenal. It allows owners to deduct the cost of wear and tear on the building portion of their property. By allocating such a high percentage of value to land, Debbie’s tax professional inadvertently left thousands of dollars in potential savings on the table.
The IRS permits any reasonable method for determining land value, so we evaluated multiple factors, including local property records, comparable properties, and appraisal reports. After carefully reassessing the allocation, we adjusted the land value to reflect a more accurate—and advantageous—amount. This will result in over $250,000 of tax savings over the next few years.
Debbie’s Big Win
The results were transformative. With a fairer allocation of land value, Debbie unlocked an additional $15,000 to $25,000 in annual tax savings. Over a 10-year period, this adjustment is projected to save her up to $250,000.
For Debbie, the implications were life-changing. That extra cash flow meant more flexibility to reinvest in additional properties, cover unexpected expenses, or even fund her dream vacation to Europe.
What This Means for You
Debbie’s story is a powerful reminder of why it’s crucial to dig deeper into your 1031 exchange. Even when the numbers seem correct, opportunities for improvement can be hiding just beneath the surface. A minor adjustment to your depreciation schedule could result in substantial long-term savings.
Are you confident your 1031 exchange has been fully optimized? Whether you’re planning a new exchange or want a fresh set of eyes on a previous one, it’s worth taking a closer look.
Maximize Your Tax Savings Today
At Exchange Planning Corporation, we specialize in uncovering opportunities like Debbie’s. Our advanced software and expert team can help you:
- Reevaluate your depreciation schedule.
- Explore cost segregation to enhance tax deductions.
- Project long-term tax savings for smarter financial planning.
Don’t leave money on the table. Contact us today to schedule a consultation and ensure your investments are working as hard as you are.
FAQs About 1031 Exchanges and Depreciation:
- Why does depreciation matter in a 1031 exchange?
Depreciation allows you to deduct the wear and tear on your property, reducing your taxable income. Miscalculating land value reduces these deductions and leaves potential savings untapped. - Can I adjust my depreciation schedule after filing?
Yes, in many cases you can. A professional review can help identify errors and guide you through the process of making adjustments. - How do you determine the right land allocation?
The IRS allows reasonable methods, including appraisals, comparable sales, and local property records, to allocate value between land and improvements. - What tools do you use to optimize 1031 exchanges?
We leverage advanced software to run tax projections, identify hidden opportunities, and ensure maximum compliance with IRS guidelines. - How can I get started?
Schedule a consultation with us today to review your exchange, identify opportunities, and map out a plan to maximize your tax savings.
Debbie didn’t just avoid taxes—she unlocked a better financial future. Are you ready to do the same? Contact Exchange Planning Corporation now and take the first step toward smarter, more profitable investing.
