Don’t Just Defer—Deduct: Leverage Cost Segregation with 1031 Exchanges
Combining a §1031 exchange with a cost segregation study enables investors to defer capital gains while accelerating depreciation on the replacement property, creating a powerful one-two punch for tax efficiency. This strategy enhances cash flow and increases immediate deductions without triggering an immediate tax liability. MSC collaborates closely with investors and tax advisors to integrate cost segregation into the 1031 process, maximizing post-exchange benefits.
What is a 1031 Exchange?
A §1031 like-kind exchange allows real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of one property into a similar, qualifying replacement property. This powerful tax-deferral strategy preserves capital and supports long-term portfolio growth. However, not all components of property qualify under §1031—especially after the 2021 IRS final regulations, which clarified the definition of real property. This is where cost segregation can provide critical clarity.
Clarifying Asset Classification in Cost Seg & 1031 Exchanges
A cost segregation study not only accelerates depreciation by identifying short-life assets, but it also helps clarify the classification of building components. Under the §1031 regulations, some assets commonly treated as personal property for depreciation purposes (like decorative lighting, cabinetry, or specialty finishes) may still be considered real property if they meet the “inherently permanent” test. MSC’s team evaluates each asset based on IRS guidelines to determine which components may still qualify for like-kind exchange treatment—and which can be depreciated more aggressively.
How MSC Can Help
This dual benefit—deferring gain through §1031 and accelerating deductions through cost segregation—makes for a powerful, compliant tax strategy. This integrated approach ensures clients not only defer capital gains but also optimize depreciation benefits on any additional “boot” payment. Following a §1031 exchange, a cost segregation study can unlock bonus depreciation opportunities on the replacement property—allowing taxpayers to accelerate deductions on newly identified short-life assets and enhance post-exchange cash flow. MSC helps clients navigate both sides of the equation to maximize value from every transaction.
Our Promise:
Over 600 national and regional CPA firms trust MSC’s expertise to help navigate the complexities of cost segregation studies. We are fully committed to our clients’ success—providing partner-level guidance, in-depth audit support, and exceptional service throughout every phase of a project.
- Experience and Credentials: MSC has a proven 30-year track record, with engineering and tax expertise, and experience across various property types and industries.
- Audit Support: MSC stands behind their work and takes great pride in the quality they deliver. All MSC engagements include complimentary lifetime audit support.
- Comprehensive Analysis: MSC performs site visits and deliver thorough reports that go beyond just software-generated results.
- Integration with Tax Strategy: MSC collaborates with your CPA or tax advisor to align the study with your broader tax planning goals, including step-ups, 1031 exchanges, and repairs vs. capitalization considerations.
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Contact us today to find out how we can capture extraordinary tax benefits for all types of entities.