Does a 1031 exchange defer depreciation recapture?

The deferral runs through basis, which is exactly why the depreciation travels with it

Section 1031 never asks what your gain is made of. It asks what your basis was, and then hands that same number to the replacement property, which is why the depreciation-driven portion cannot be separated out and taxed on its own.

Section 1031(d) is the operative sentence: the basis of property acquired in the exchange "shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain ... that was recognized on such exchange." Your basis had already been written down by every year of depreciation, so the replacement inherits that write-down whole.

The IRS says the consequence in five words in its like-kind exchange fact sheet: "Gain is deferred, but not forgiven."

The replacement keeps depreciating on the old clock, and that is the real price you pay

Deferring the depreciation also caps what you can deduct from here on. Regulation §1.168(i)-6 splits the replacement into two pieces and only one of them gets a fresh start.

The "exchanged basis" — the carried-over number — keeps running on the relinquished property's remaining recovery period using the same method, rather than restarting at 27.5 or 39 years. Only the "excess basis", meaning new money you add above that carried-over figure, is "treated as property that is placed in service by the acquiring taxpayer in the year of replacement."

A Delaware Statutory Trust does not change the mechanic. Because Rev. Rul. 2004-86 holds that a taxpayer "may exchange real property for an interest in the Delaware statutory trust" without recognition under §1031, your share of the trust's real estate carries the same two-part schedule. How DST depreciation is allocated to investors is covered separately.

On a straight-line building the layer returns at 25%, not as ordinary income

Most landlords are not carrying section 1250 ordinary recapture at all, which surprises people who expect a punitive rate. Section 1250 recaptures only "additional depreciation" — the excess over straight line — and Publication 544 confirms there is none where the property was "residential rental property or nonresidential real property placed in service after 1986 ... you held it longer than 1 year."

What you are actually carrying is unrecaptured section 1250 gain: long-term capital gain taxed at a maximum 25% rate under section 1(h)(1)(E), measured by the depreciation itself rather than by any excess. That is the number a 1031 exchange pushes down the road.

Sizing that number on your own building is worked through here.

A hypothetical $1.6 million sale: $75,000 of the deferred bill is the depreciation layer

Round hypothetical numbers show what actually moves. You bought a rental for $1,000,000 with no debt, claimed $300,000 of straight-line depreciation, and sell for $1,600,000 with $100,000 of closing costs.

• Amount realized $1,500,000, adjusted basis $700,000, realized gain $800,000.
• Sold for cash, $300,000 of that gain is unrecaptured section 1250 gain at 25%, or $75,000.
• The other $500,000 is long-term capital gain at 20% for a married couple whose 2026 taxable income clears the $613,700 maximum 15% rate amount, or $100,000.
• The 3.8% surtax then applies to the full $800,000, a further $30,400, bringing the federal total to $205,400 before any state tax.
• Exchanged in full into DST interests instead, nothing is due, your basis in the DST interests is $700,000, and the whole $800,000 — including the $300,000 depreciation layer — stays deferred.

Boot and a §1245-light replacement are the two ways part of it surfaces now

A fully deferred exchange into ordinary real estate defers all of it. Two facts break that, and both are worth checking before you sign anything.

Cash or net debt relief you keep is recognized gain, and the recapture layer is taken out of that recognized gain before any capital gain is: the ordering rule is set out here.

The second is quieter and catches owners who ran a cost segregation study. Where part of your basis sits in section 1245 property, section 1245(b)(4) can produce ordinary income even though you took no cash at all, and that trap has its own page.

Death is the only event that deletes the layer, and two statutes say so directly

Section 1245(b)(2) and section 1250(d)(2) each provide that recapture does not apply "to a transfer at death", with an exception only for income in respect of a decedent. Nothing else in either statute wipes the layer out.

Section 1014(a)(1) then resets basis to "the fair market value of the property at the date of the decedent's death." The deferred depreciation and the gain it sits inside go with it, and your heirs begin a new depreciation schedule from that stepped-up figure.

How that plays out when the asset is a DST interest is covered here, and the wider hold-until-death plan here.

Opportunity zone and bonus-depreciation funds handle the same dollars on different terms

A qualified opportunity fund is not a substitute for this deferral. Only "eligible gain" can go in, and Reg §1.1400Z2(a)-1(b)(11) requires it to be capital gain or a "qualified 1231 gain", which is itself measured net of any amount "treated as ordinary income under section 1245 or section 1250."

So section 1245 ordinary recapture can never be deferred into a QOF. Unrecaptured section 1250 gain can, but Reg §1.1400Z2(a)-1(c) provides that deferred gain "has the same attributes in the taxable year of inclusion that the gain would have had", so it comes back at 25% rather than 20%. More on how opportunity zone funds fit a real estate sale.

Bonus depreciation funds work from the other direction, generating deductions that offset income rather than deferring the gain at all; they are described here and compared with the other two routes here. Because rates, brackets and cost-segregation allocations all differ by taxpayer, treat every number above as a template and have your CPA or attorney run yours.