Depreciation Recapture in a 1031 Exchange

The Recapture Side

Exchange fully and everything defers — gain and recapture alike. Take boot, and the recognized gain comes out recapture-first: the unrecaptured Section 1250 amount (up to 25%) is taxed before any of it gets capital-gains treatment. Cash out $100k against years of depreciation and most of that check can be 25% money.

The Basis Side

Your old basis carries over — the exchange doesn't reset it. New depreciation applies only to the value you ADD. Worked example: a fully depreciated $500k property exchanged into a $500k replacement generates zero new depreciation. Exchange it into a $1.25M property and you depreciate the $750k of new investment.

That's the honest trade: deferral costs you depreciation. The exit is the step-up at death, which erases the whole ledger.

Is recapture taxed if I exchange fully?

No. A complete exchange defers recapture along with capital gain. It only surfaces when you take boot or sell without exchanging.

Can I choose what boot is taxed as?

No — the ordering is fixed. Recapture first (up to 25%), capital gain second.

Does the 25% rate apply to all recapture?

For straight-line depreciated real estate, it's "unrecaptured Section 1250 gain," capped at 25%. Accelerated methods can trigger harsher treatment — rare for buildings.