Erik Oliver explains how a 1031 exchange defers two taxes when you sell real estate: ordinary income tax on depreciation recapture and capital gains tax. The trick is timing. You take depreciation deductions now at 35-40% rates, then defer the recapture to pay later at 20% capital gains rates, capturing a tax spread.
there's some strategy to the exit, but even like 1031s are a great tool because it does defer those two types of tax. When you sell an asset, you pay your recapture tax. That recapture tax is typically calculated based on the amount of depreciation you've taken. I think that's what you were getting at is I'm sitting here saying, hey, front load all that depreciation, but when I sell it, don't I just have to pay it back? And the answer is no and yes, you do pay it back. If you don't do a 1031 exchange and you just pay it back as a capital gain, you're paying it back at, at, at the highest rate of 20%, but you're taking your deduction at like a 35 to 40%. You're moving it into a different bucket altogether. Yeah. Right. You're moving it into a different bucket and we're playing a rate arbitrage where you're taking your deduction at 35, 40%, paying it back at 20% and saving the spread.
