Avoid This 1031 Exchange Mistake That Kills Your Tax Benefit

Real estate investors using a 1031 exchange to defer capital gains often miss a critical step: correctly calculating the excess basis for a cost segregation study. According to Brian Kiczula of CostSegRx, the mistake lies in confusing the carried-over gain with the new depreciable base. When you sell one property and buy another via a 1031, the depreciation method from the old property carries forward. Only the portion above that carryover—the excess basis—qualifies for a cost segregation study. Investors and CPAs sometimes assume the excess basis is simply the total gain transferred, but that miscalculation can jeopardize the 1031 exchange itself. Kiczula emphasizes that accuracy is crucial: using the wrong number risks disrupting the like-kind exchange, not just reducing depreciation benefits.

Not every 1031 exchange justifies a cost segregation study. If the replacement property costs only slightly more than the relinquished one, the excess basis may be negligible, making a study uneconomical. Kiczula advises doing the math upfront to determine if a benefit exists. Collaboration between the cost segregation provider and the CPA must happen early—before closing—to ensure proper documentation. The provider needs the fixed asset schedule from the original property, closing statements, and exchange documents to calculate carryover basis accurately. Without these, any benefit estimate is built on incomplete information. CostSegRx, an engineering-based firm led by Kiczula, offers complimentary estimates and works with investors nationwide to ensure correct calculations from the start.