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Depreciation Recapture

Depreciation recapture is a tax concept that can come into play when a property owner sells an asset that has been depreciated for tax purposes. In the context of a 1031 exchange, which allows for the tax-deferred exchange of like-kind properties, depreciation recapture can affect the tax consequences of the transaction.

Depreciation is a tax deduction that allows property owners to deduct a portion of the cost of an asset over its useful life. When the property is sold, any gain realized from the sale may be subject to depreciation recapture, which means that the tax on the gain is calculated as if the depreciation deduction had not been taken.

In a 1031 exchange, if the property being sold has been depreciated, the amount of depreciation that has been taken must be recaptured and recognized as taxable income, even if the owner is exchanging the property for another like-kind property. This means that the owner may owe taxes on the recaptured depreciation even if they are not taking any cash out of the transaction.

However, if the property owner uses the proceeds from the sale to purchase another like-kind property in a 1031 exchange, they can defer paying taxes on the gain, including the recaptured depreciation, until the new property is sold.