--- title: Could Your Next 1031 Exchange Do More Than Defer Taxes? description: In a 1031 exchange, the investor may be able to defer gain on the old property while accelerating deductions on components of the new property. 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Fewer realize that the replacement inv\[...\] [1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [DST](https://blog.fgg1031.com/blog/topic/dst) [Read More](https://blog.fgg1031.com/blog/could-your-next-1031-exchange-do-more-than-defer-taxes) ## Recent Posts [1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [DST](https://blog.fgg1031.com/blog/topic/dst) # Could Your Next 1031 Exchange Do More Than Defer Taxes? By [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Most real estate investors know that a Section 1031 exchange may defer tax on the gain from a property they sell. Fewer realize that the replacement investment may create a second planning opportunity: accelerated depreciation. In the right situation, an investor may be able to defer gain on the old property while accelerating deductions on qualifying components of the new property. But the largest deduction is not necessarily the best strategy. The real objective is to match the investment and the depreciation strategy to the investor’s own tax situation. That distinction is especially important today. **Under current federal law, 100% bonus depreciation is available for certain qualified property acquired after January 19, 2025.** For real estate investors, a properly prepared cost segregation study may identify shorter-lived assets that are potentially eligible for this accelerated treatment. The building itself generally is not bonus-depreciation property. The strategy can apply to investors who buy replacement real estate directly, and it can also be relevant to investors who use qualifying **Delaware Statutory Trust (DST)** interests as replacement property in a 1031 exchange. The implementation, however, is different - and that is where careful planning becomes important. #### **1. Two Tax Strategies - Two Different Jobs** A Section 1031 exchange and bonus depreciation are sometimes discussed as if they are competing tax techniques. They are not. **They address different parts of the transaction.** **Section 1031** generally allows qualifying gain to be deferred when business or investment real property is exchanged for qualifying like-kind real property. **Bonus depreciation** accelerates the deduction of certain qualifying depreciable assets rather than spreading those deductions over several years. **A simple way to remember it:** The 1031 exchange is primarily about what happens when you SELL. Cost segregation and bonus depreciation are primarily about how qualifying components of what you BUY may be depreciated. #### **2. Why Cost Segregation Matters** A building is not one single asset for federal depreciation purposes. A cost segregation study examines the property and may identify components that have shorter recovery periods than the building itself. Depending on the property and the facts, qualifying items can include certain electrical systems, finishes, equipment, landscaping, parking improvements, site lighting and other assets. The IRS recognizes cost segregation as a depreciation methodology and publishes an Audit Techniques Guide for evaluating these studies. When shorter-lived assets meet the applicable requirements, they may be eligible for accelerated depreciation, including 100% bonus depreciation under current law. Example A: Directly Owned Replacement Property **Illustration - not a tax projection** Assume an investor completes a 1031 exchange into a larger rental property. After applying the 1031 basis rules, a qualified cost segregation study and the investor’s tax advisor determine that $150,000 of basis is eligible for 100% bonus depreciation. That could create a $150,000 first-year deduction. If the investor could fully use the deduction and were in a hypothetical 35% federal marginal bracket, the federal tax effect could be roughly $52,500. The actual result could be very different because basis, passive-loss rules, at-risk rules, state taxation and the investor’s other income all matter. The point is not the $52,500 number. The point is that **a 1031 exchange may defer gain and a separate depreciation analysis may create current deductions.** Those are two different calculations that can coexist in the same transaction. #### **3. How This Can Work With Delaware Statutory Trusts** A properly structured DST may qualify as replacement real property for Section 1031 purposes under the facts and limitations described in IRS Revenue Ruling 2004-86. DSTs are therefore frequently considered by investors who want fractional ownership of institutional-style real estate without taking on direct day-to-day property management. Cost segregation can be relevant here as well. **Many DST sponsors - but not all - commission or provide cost segregation studies or related depreciation allocations for their offerings.** Practices vary by sponsor, property type and offering. When a study is used, the sponsor’s tax-reporting package may reflect the resulting depreciation allocations, but each investor’s personal tax consequences still depend on that investor’s basis and individual tax circumstances. **Example B: Two DSTs With Similar Cash Flow - But Different Tax Profiles** **The investment decision should not stop at the distribution rate** Suppose an investor has $500,000 of exchange equity and is comparing two DSTs with similar projected cash distributions. DST A owns a recently acquired property for which the sponsor has obtained a detailed cost segregation study and projects significant first-year depreciation. DST B owns a property with a different basis history and less accelerated depreciation. For an investor who has substantial passive income to offset, DST A’s depreciation profile could be valuable. For another investor who already has large suspended passive losses, the extra first-year deduction may provide little immediate benefit. The “better” DST therefore cannot be determined from depreciation alone. This is why a headline such as “80% first-year depreciation” or “100% bonus depreciation available” should never be the end of the analysis. **The question is how much depreciation is attributable to this particular investor, whether the investor can use it, and what the long-term consequences may be.** #### **4. A 1031 Exchange Does Not Give You a Fresh Tax Basis Equal to the Purchase Price** One of the most important concepts in this area is basis. In a qualifying 1031 exchange, the tax basis from the relinquished property generally carries into the replacement property, subject to adjustments. If the investor contributes additional consideration to acquire a larger replacement property, that may create additional or “excess” basis. The depreciation rules can treat carryover basis and excess basis differently, particularly when determining eligibility for bonus depreciation in property acquired through an exchange. This is one reason an investor should not simply take the purchase price of the replacement property, multiply it by a cost-segregation percentage, and assume the result is immediately deductible. **Important:** The exchange value, purchase price, depreciable basis, cost-segregation allocation and amount an individual investor can actually deduct are not necessarily the same number. #### **5. More Depreciation Is Not Always Better** Accelerated depreciation can be extremely useful, but **it is not automatically the right objective for every investor.** Some investors may already have substantial suspended passive losses. Others may have relatively little passive income against which additional losses can currently be used. Some may expect their tax circumstances to change in future years. And accelerated deductions generally reduce basis, which may affect the tax consequences when the investment is ultimately sold. Federal passive-activity and at-risk rules may also limit when a depreciation-generated loss can be used. A deduction that cannot be used currently may be suspended and carried forward rather than producing an immediate tax benefit. **The better question:** Do not ask only: “Which property gives me the most depreciation?” Ask: “Given my current income, existing passive losses, tax bracket, exchange basis and long-term goals, how much accelerated depreciation would actually help me?” #### **6. Why This Analysis Should Happen Before the Exchange Is Completed** The most useful time to consider these issues is before the replacement investment is finalized. An investor’s CPA or other personal tax advisor can estimate whether accelerated depreciation is likely to be useful and can help evaluate basis, passive-loss limitations and potential future recapture consequences. At the same time, experienced 1031 and DST professionals can help compare the available replacement-property choices: property type, sponsor, leverage, targeted cash flow, lease structure, market, potential appreciation, hold-period assumptions and the availability of cost-segregation information. #### **Five questions worth asking before selecting replacement property** *What is my estimated tax basis in the replacement investment after the 1031 exchange?* *Does the property or DST offering have a cost segregation study, and who prepared it?* *How much depreciation is actually expected to be allocable to me?* *Can I use the anticipated depreciation now, or is some of it likely to be suspended?* *How does the tax profile compare with the investment’s targeted cash flow, debt, risk and appreciation potential?* #### **The Bottom Line** A Section 1031 exchange may defer gain. Cost segregation may identify qualifying shorter-lived assets. Current law may allow 100% bonus depreciation for qualifying property. DSTs may offer access to these same general concepts, and many sponsors provide cost segregation information - but not every sponsor or offering does. The opportunity can be significant, but **accelerated depreciation is not needed by every investor and should never be evaluated in isolation.** Before selecting replacement property, investors should work closely with their own CPA or other tax professional and with experienced FGG professionals to determine which investment and tax strategy best fits their individual objectives. **A practical objective:** The goal is not to maximize a single tax deduction. The goal is to select a sound replacement investment and coordinate the 1031 exchange, depreciation strategy and long-term investment plan in a way that makes sense for the individual investor. **For further information on 1031 replacement-property strategies, DSTs and our comparison process, contact the professionals at First Guardian Group / FGG1031. Download our ebook to learn more by clicking the image below: ** **[![](https://no-cache.hubspot.com/cta/default/5468919/interactive-183027517748.png)](https://blog.fgg1031.com/hs/cta/wi/redirect?encryptedPayload=AVxigLJxFxlu%2F04i%2FLY8AqdD8iSjpIqtWOv%2BR%2Ff73dsJaQJV1jEM5VKblUIoR1J1neDL3ZTF4CFoKslxiamX3surO81nl0ixCsDXu7HLc1xEaNembteUxJuDWoKqeB1Q1fDo8EkJFZEYiECkQafszSAOPU1dD%2BJ%2BprY1IDO8b2gLcDd8T9JZNq9AW8R%2BSlWr64CUXV%2FBRRRH2fhXr5oFfJbC3Tqyl41HxN1EWg96DsVtgZNx&webInteractiveContentId=183027517748&portalId=5468919)** --- **Important Tax and Investment Disclosure** This material is for educational and informational purposes only and is not intended as tax, legal or accounting advice, nor as an offer or recommendation to purchase any security. Tax results vary based on individual circumstances and applicable federal and state law. Investors should consult their own qualified tax and legal advisors before making tax or investment decisions. DST interests are securities and involve investment risk, including possible loss of principal, lack of liquidity, sponsor risk, real estate market risk and limitations on investor control. Tax laws and interpretations may change. **Selected IRS References** • IRS, Treasury and IRS guidance on the additional first-year depreciation deduction (Jan. 14, 2026) - permanent 100% bonus depreciation for qualifying property acquired after Jan. 19, 2025 under current law. • IRS, Like-Kind Exchanges - Real Estate Tax Tips (updated May 1, 2026). • IRS Publication 946, How To Depreciate Property (2025 revision), including special depreciation allowance and like-kind exchange basis guidance. • IRS Publication 925, Passive Activity and At-Risk Rules (2025 revision). • IRS Revenue Ruling 2004-86, Delaware Statutory Trust classification and Section 1031 treatment under the facts described in the ruling. • IRS Cost Segregation Audit Techniques Guide (2025 publication). ### [Paul Getty](https://blog.fgg1031.com/blog/author/paul-getty) Paul M. Getty is one of the most experienced 1031 exchange specialists in the United States, with a career in real estate that spans over 35 years and more than $5 billion in commercial transactions across every major asset class. His work covers single-family rentals, apartments, retail, office, multifamily, and student and senior housing, giving him a practical understanding of how different property types perform across market cycles and how investors can move between them using tax-deferred exchange strategies. As President and CEO of FGG1031 | First Guardian Group, Paul advises investors through the full 1031 exchange process, from identifying qualifying replacement properties to structuring acquisitions through Delaware Statutory Trusts (DSTs) and wholly owned real estate. His guidance covers both the compliance requirements of a valid exchange and the investment decisions that determine long-term portfolio outcomes – a combination that is difficult to find in a single advisor. Paul holds a California and Texas real estate broker license and carries Series 22, 62, 63, and 82 securities licenses as a registered representative with Emerson Equity LLC, member FINRA /SIPC. He has represented buyers and sellers across complex commercial transactions, sourced and structured debt and equity, and worked alongside nationally recognized firms including Marcus Millichap, CBRE, JP Morgan, and Morgan Stanley. Before founding FGG1031, he co-founded Venture Navigation, a boutique investment banking firm whose M&A and IPO activity generated over $700 million in investor returns. Paul holds an MBA in Finance from the University of Michigan and a bachelor’s degree in chemistry from Wayne State University. He has also completed coursework in artificial intelligence at Stanford University. He is the author of four books on real estate investing and tax deferral strategy, including Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST) and Real Estate Investing in the New Era, both available on Amazon. A frequent speaker on 1031 exchanges, DST investing, and real estate tax strategy, Paul Getty is a recognized voice for investors and advisors seeking guidance on capital preservation through tax-deferred real estate investment. ## Your Comments : This is a search field with an auto-suggest feature attached. - There are no suggestions because the search field is empty. - Latest Posts - Popular Posts [Could Your Next 1031 Exchange Do More Than Defer Taxes?](https://blog.fgg1031.com/blog/could-your-next-1031-exchange-do-more-than-defer-taxes) [ 1031 Exchange](https://blog.fgg1031.com/blog/topic/1031-exchange) [ DST](https://blog.fgg1031.com/blog/topic/dst) [ New featured](https://blog.fgg1031.com/blog/topic/new-featured) [Apartments at Midyear 2026:
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October 20, 2022](https://blog.fgg1031.com/blog/what-is-a-springing-llc) ## Useful Links - Home - About Us - Blogs - Testimonials from Past Customers - Resource Center - Current Offerings Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum. This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal. Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  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. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. 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. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits. IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. Securities offered through registered representatives of [LightPath Capital, Inc.](http://www.lightpathcapital.com/) Member [FINRA](http://www.finra.org/) / [SIPC](https://www.sipc.org/). FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities. Copyright 2022, All Rights Reserved, FGG1031 [![FGG_Footer_White](https://blog.fgg1031.com/hs-fs/hubfs/FirstGuardianGroup_2022/FGG_Footer_White.png?width=300&height=95&name=FGG_Footer_White.png "FGG_Footer_White")](http://fgg1031.com) 97 East Brokaw Road, Suite 350, San Jose, CA 95112 [(866) 398 1031](tel:(866)%20398%201031) [info@firstguardiangroup.com](mailto:) [![Bitmap](https://blog.fgg1031.com/hubfs/FirstGuardianGroup_2023/Bitmap.png)](https://brokercheck.finra.org/individual/summary/6470002) ## Recent Blogs - [Understanding the Difference Between Inheritance and Estate Tax August 3, 2023](https://blog.fgg1031.com/blog/understanding-the-difference-between-inheritance-and-estate-tax) - [Public or Private Real Estate? Your Investment Portfolio May Need Both July 27, 2023](https://blog.fgg1031.com/blog/public-or-private-real-estate-your-investment-portfolio-may-need-both) - [How to Use 1031 Exchange Funds to Improve Your Replacement Property July 20, 2023](https://blog.fgg1031.com/blog/how-to-use-1031-exchange-finds-to-improve-your-replacement-property) ## Useful Links - [Home](http://fgg1031.com/) - [About Us](https://fgg1031.com/about-us/) - [Blogs](https://blog.fgg1031.com/blog) - Testimonials from Past Customers - [Resource Center](https://fgg1031.com/resource-center/) - [Current Offerings](https://fgg1031.com/property-listings-directory/) FGG1031 | First Guardian Group and Emerson Equity LLC do not provide legal or tax advice. Securities offered through [Emerson Equity LLC](http://www.emersonequity.com/) Member [FINRA/SIPC](http://finra.org/) and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 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 No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results. Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or [FDIC](http://fdic.org/) insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur. **Risk Disclosure:** Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by FGG1031 | First Guardian Group, Emerson Equity LLC, or any affiliate, or partner thereof. FGG1031 | First Guardian Group does not warrant the accuracy or completeness of the information contained herein. Copyright 2026, All Rights Reserved, FGG1031