Quiz: 1031 Exchanges | Learn | The Upland Group

1. A 1031 exchange allows you to:

Avoid paying property taxes permanentlyDefer capital gains tax by reinvesting sale proceeds into a like-kind property within specified timelinesConvert rental income into tax-free incomeDeduct the full purchase price in year one

Section 1031 allows you to defer (not eliminate) capital gains tax by selling one investment property and purchasing another of equal or greater value. You have 45 days to identify replacement properties and 180 days to close. The tax bill is deferred until you eventually sell without exchanging.

2. Residential rental property is depreciated over:

5 years27.5 years39 years15 years

The IRS allows you to depreciate residential rental property over 27.5 years (commercial is 39 years). On a $300,000 building (excluding land), that's roughly $10,900/year in paper losses that offset your rental income on your tax return, even though the property may be appreciating in reality.

3. Cost segregation accelerates depreciation by:

Making the building worth lessReclassifying building components (appliances, flooring, landscaping) into shorter depreciation schedules (5, 7, or 15 years) for larger deductions in early yearsEliminating the need to pay taxes foreverReducing the property's assessed value for tax purposes

Cost segregation studies identify components that qualify for 5-year (appliances, carpet), 7-year (furniture, fixtures), or 15-year (landscaping, parking lots) depreciation instead of 27.5 years. This front-loads deductions into early ownership years. With bonus depreciation, some components can be fully deducted in year one.

4. Under passive loss rules, a taxpayer with $100,000 W-2 income and $20,000 in rental losses can deduct those losses against their W-2 income if:

They always can, regardless of incomeTheir modified AGI is under $100,000 (phaseout begins at $100K, eliminated at $150K) and they actively participate in managementThey own more than 10 propertiesThey never can under any circumstances

The IRS allows up to $25,000 in passive rental losses to offset active/W-2 income if you actively participate and your modified AGI is below $100,000. The deduction phases out between $100K-$150K. Above $150K, passive losses can only offset passive income (unless you qualify as a Real Estate Professional).

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