Updated August 17, 2026
Sellers who exchange into a larger building often expect a fresh depreciation schedule on the full purchase price. That is not the default, and the difference matters to after-tax cash flow for years. Under the standard rules the old schedule continues on the portion of basis you carried over, and only the amount you traded up by starts fresh. There is an election to change that treatment, and it has to be made on a timely return for the year you acquire the replacement.
This is genuinely a CPA's decision. What follows is what a seller should understand well enough to ask the right question.
After an exchange, the replacement property's depreciable basis is made of two components that are treated differently:
Carryover basis — the adjusted basis you brought forward from the relinquished property. Under the default rules this continues depreciating on the relinquished property's existing schedule. It does not restart. If you were fourteen years into a 27.5-year residential schedule, you continue from year fifteen, over the remaining recovery period.
Excess basis — any additional amount you invested by trading up. This portion is treated as newly placed in service and depreciates over the replacement property's full recovery period from acquisition.
So a seller who exchanges a fully depreciated 1970s building into a larger one does not get a full new schedule. They get whatever remains of the old one, plus a fresh schedule on the increment.
This is why "trading up defers the tax" and "trading up improves my cash flow" are two different claims, and only the first is reliably true.
An owner who has held a building for twenty-five years may have very little carryover basis left to depreciate. Exchanging into a larger asset gives them a new schedule only on the step-up in purchase price. The sheltered portion of the new income is smaller than they expect, and the tax bill in year one is larger.
Sellers who model an exchange on the assumption of a fresh full-price schedule are consistently disappointed, and it is a disappointment that is entirely avoidable by asking the CPA to run it properly first.
The rules permit an alternative: electing out of the default treatment and depreciating the entire basis as newly acquired property, over the replacement property's recovery period.
That can produce a longer schedule on the carryover portion — which may or may not help depending on the numbers. Whether it improves your position depends on how much recovery period was left on the old schedule, the property types involved, and your broader tax picture.
The mechanics that matter to a seller:
The governing authority sits in IRC §1031(d) and the regulations under §1.168(i)-6T, which is a reasonable thing to name when you ask your CPA about it.
Worth stating plainly because it is the most common misunderstanding sitting next to this one.
A 1031 exchange defers depreciation recapture along with the capital gain. It does not eliminate it. All that accumulated depreciation follows you into the replacement property, and it comes due when you eventually sell without exchanging again.
Two consequences:
The deferred amount grows. Each exchange adds the new property's depreciation on top of the old, so a seller who exchanges three times is carrying a substantially larger recapture exposure than after the first.
Death resolves it. The step-up in basis at death generally eliminates the deferred gain and the accumulated recapture — which is precisely why "exchange and hold until death" has been a standard strategy for California multifamily families for decades. That decision is covered properly in sell now vs. hold for the step-up.
If you have had a cost segregation study on the relinquished property — accelerating depreciation by reclassifying components into shorter recovery periods — that history follows into the exchange and complicates the carryover calculation.
It is not a reason to avoid either. It is a reason to make sure the CPA handling the exchange has the study and understands what was accelerated, before the replacement's schedule is set up.
Does depreciation restart after a 1031 exchange?
Not by default. The carryover basis continues on the relinquished property's existing schedule over its remaining recovery period; only excess basis from trading up starts fresh. An election exists to treat the whole basis as newly acquired, made on Form 4562 with a timely return.
If I trade up, do I get a bigger deduction?
On the increment, yes — the excess basis depreciates over a full new recovery period. On the carried-over portion, no. Whether the total is meaningfully better depends on how much recovery period was left on the old schedule.
Does a 1031 exchange avoid depreciation recapture?
It defers it. The recapture exposure carries into the replacement property and is owed when you eventually sell without exchanging. It is only eliminated by a step-up in basis at death.
Should I make the election?
That is a modeling question for your CPA, not a default. It depends on the remaining recovery period, the property types and your wider tax position — and it must be filed on time for the year the replacement is received.
Does this change if I exchange into a different property type?
It can. Recovery periods differ between residential rental and commercial property, and the interaction with the carryover schedule is one of the specific things worth raising with your CPA before you identify a replacement outside residential.
The exchange defers the tax; it does not hand you a clean slate. Ask your CPA one question before you commit to a replacement: what does my depreciation actually look like in year one after this exchange, under both the default and the election? Sellers who get that answer before identifying property make better replacement decisions than those who discover it at filing.
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