1031 Exchange Sample Study, Default Rule
An apartment replacement property bought through a 1031 exchange, studied on its excess basis with the carryover basis on its own schedule.
Illustrative sample
Dollar figures shown are illustrative and come from the sample's own data. Estimates, never guarantees; results depend on your specific tax situation.
The Property and the Land
Property type
Square feet
104,000
Year built
2008
Units
96
Stories
3
Acquired
March 20, 2026
Placed in service
March 20, 2026
Replacement property cost
$4,750,000
Excess basis studied
$2,200,000
Land value
$330,000
How the land was set
Default allocation of 15% of the excess basis
Building basis
$1,870,000
The three positions describe the building only. Land is carved out first and never depreciates, so the less of the price assigned to land, the more there is to depreciate: a low land value is the aggressive land position and a high land value is the conservative one.
The Three Positions
| Position | Conservative | Middle of the Road | Aggressive |
|---|---|---|---|
| Share of the building basis moved | 20% | 28% | 38% |
| First year depreciation with the study | $417,070 | $562,363 | $743,979 |
| Additional first year depreciation | $363,233 | $508,526 | $690,142 |
First year depreciation without a study: $53,837.
Part 1A sets out 9 combinations of land value and position.
How the Basis Was Classified
Classification method: Modeled residual method. This sample is modeled: no site inspection, no engineering take off and no documents were reviewed, and the PDF says so in its methodology.
The class totals below are at the Middle of the Road position, the one this study states.
| Class | Amount | Share of basis |
|---|---|---|
| 5 year property | $366,520 | 20% |
| 15 year land improvements | $157,080 | 8% |
| Building on its 27.5 year life | $1,346,400 | 72% |
16 asset rows in the classification schedule.
Every dollar of the $1,870,000 basis is allocated.
$366,520 of section 1245 property, 20% of the basis. What section 1245 property is
Bonus rate 100% on the sample's dates: acquired March 20, 2026, placed in service March 20, 2026.
Bonus basis in the study $523,600, bonus amount $523,600.
Which bonus rate applies to which datesWhich property gets bonus depreciation
The Exchange Basis
Carryover basis
$1,150,000
Excess basis studied
$2,200,000
First year depreciation on the carryover basis
$76,356
This study applies the default rule, makes no election, and keeps the carryover basis and the excess basis on separate schedules.
The carryover schedule runs 15 years in this study.
The PDF's exchange part explains the rule the study applied; your CPA confirms it.
The default rule and the election are set out below, with their source.
- Treasury Regulation 1.168(i)-6 sets the default depreciation rules for property received in a like kind exchange. The exchanged basis generally keeps depreciating on the schedule already running for the property given up, and the excess basis, which is any basis above the exchanged basis, is treated as newly placed in service and depreciated separately. A taxpayer may elect not to apply these rules. With the election, the exchanged basis and the excess basis together are treated, for depreciation only, as property placed in service at the time of replacement, and the property given up is treated as disposed of, so a new recovery period begins for all of the basis. The election does not change whether the exchange is tax deferred under section 1031. It is made separately for each exchange on a timely filed return, including extensions, for the year of replacement, and once made it can be revoked only with the consent of the Commissioner, which is granted only in extraordinary circumstances. Where the other requirements of section 168(k) are met, bonus depreciation reaches only the excess basis when the replacement property is used property, with or without the election. When the original use of the replacement property begins with the taxpayer, the exchanged basis is eligible as well. Source: Treas. Reg. section 1.168(i)-6(b)(7) and (8), (c), (d)(1), (i)(1) and (j); Treas. Reg. section 1.168(k)-2(g)(5)(iii)(A) and (D); Instructions for Form 4562 (2025), Property acquired in a like-kind exchange or involuntary conversion
Quality and Audit Risk
8 of the 13 principal elements met and 5 partial, by the study's own scorecard.
Audit risk gauge: green, with 28% of the basis in the shorter lives.
What Is in the PDF
This PDF adds: Part 14 Supplement: §1031 Exchange Basis.
The PDF runs 48 pages.
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