Can I 1031 exchange into a bonus depreciation fund?

Units are on the excluded list, and no amount of real estate inside the fund changes that

The Tax Cuts and Jobs Act narrowed §1031 to real property, and the 2020 regulations then said which intangibles count. Reg. §1.1031(a)-3(a)(5)(i) rules out 'interests in a partnership' along with stock, notes, other securities and certificates of beneficial interest, whatever state law calls them.

One narrow exception exists: §1031(e) treats an interest in a partnership that has made a valid §761(a) election out of subchapter K as an interest in each of the underlying assets. Pooled depreciation funds are not structured that way, because the election requires co-ownership rather than a managed pool.

The general version of this rule is in 1031 into a syndication, fund or LLC interest; why a Delaware Statutory Trust escapes it is in the like-kind question.

A deduction beside the gain is not the same as a gain that never appears

An exchange removes the gain from the return entirely and carries your old basis forward. A fund does nothing to the gain: you report it, and the fund's Schedule K-1 brings a loss that may reduce taxable income in the same year. That is the whole of the 'lazy 1031' idea, and the label is a marketing phrase rather than a code section.

The difference shows up on exit. A deferred gain can be deferred again, or wiped out at death; a bonus deduction is borrowed from later years and repaid, because §168(k)(1)(B) reduces basis by the amount deducted.

Timing is unforgiving in a way an exchange is not. The deduction and the gain have to land in the same tax year, which means the fund's property must be acquired and placed in service by December 31, so a subscription signed in January cannot reach a gain you reported in December.

Breakwater Exchange places sellers into both Delaware Statutory Trusts and accelerated depreciation funds, and the two are compared at length in using bonus depreciation funds alongside or instead of a 1031.

The loss only reaches your gain if the gain itself is passive

Reg. §1.469-2T(c)(2)(i)(A) treats gain on the disposition of an interest in property used in an activity as gross income from that activity, and as passive activity gross income where the activity was passive in the year of disposition. A rental you did not materially participate in produces exactly the kind of income a fund's passive loss can absorb.

Turn that around and the pitch weakens. If you materially participated, the gain is non-passive and the fund's loss cannot touch it unless you qualify under the real estate professional test in §469(c)(7).

Salary, interest and dividends sit outside this entirely, which is why a fund is a poor answer for a high earner with no passive income.

Four limits stand between the K-1 loss and your tax bill

Each of these is independent, and a fund's projection usually assumes none of them binds you. Check them against your own return before signing.

• Recovery period: only components with a MACRS life of twenty years or less qualify, so the deduction comes from the cost-segregation study, not from the purchase price.
• Acquisition date: the 100% rate applies to property acquired after January 19, 2025; earlier acquisitions fall under the phase-down percentages the 2025 act repealed going forward.
• Excess business loss: for 2026 the §461(l) threshold is $256,000 single and $512,000 joint, and anything beyond it becomes a net operating loss carryforward.
• Basis and at-risk: your deductible share cannot exceed your basis in the units under §704(d) or the amount you have at risk under §465, which leverage inside the fund complicates.
• Placed in service: the deduction arrives in the year the fund's property is placed in service, not the year you wired the subscription.

The arithmetic of sizing a fund against a gain, with the ratio taken from the offering

Hypothetical, round numbers: you recognize $900,000 of passive gain on a sale you chose not to exchange. If the offering's own projection allocated a first-year loss equal to 70% of subscribed capital, sheltering that gain would take roughly $1,285,000 of capital, which is more than the gain you were trying to protect.

Take the loss ratio from the specific fund's projections and from your CPA, never from a rule of thumb; it depends on the assets, the cost segregation and the leverage, and it is a projection rather than a promise.

Then price the round trip: the deduction offsets gain taxed at up to 25% on the depreciation layer and 20% above it plus net investment income tax, while the §1245 components come back as ordinary income on the fund's exit. Where the rate arbitrage runs backwards sets out that comparison in full.

Where a trust and a fund work together instead of competing

The useful combination starts from how much of the proceeds you want to keep. Exchange the portion you want fully deferred into replacement property, including a traditional DST if you want it managed, and take the rest deliberately as boot rather than letting the exchange fail by accident (intentional boot).

The fund then has a defined job: absorb the tax on that boot in the same tax year, subject to the four limits above. Sizing it to the boot rather than to the whole gain keeps the capital commitment proportionate.

Sizing it to the boot also keeps the recapture manageable. Because §168(k)(1)(B) cuts basis by the amount deducted, a smaller subscription means a smaller ordinary-income bill when the fund sells, and that bill lands in a year you have not chosen.

Ask your CPA or attorney to run both the boot year and the fund's exit year before you commit, because the two sit in different brackets.