Thank you for hte additional information.
That article and its references are correctd and accurate information. While the information at that site is dated 2005, it is still valid today.
According to IRS Publicaiton 544, you do not pay the recapture at this time, as lolng as your like kiknd exchange is a true exchange.....meaning,, the acquired or exchang property is equal to or greater in price (value) to the old (exchanged) property.
There are other qualifiers for this to be completely tax free (tax deferred actually) exhange.
Depending on the relatilonal charachter of the two properties includiing use, they may not be treated the same.
ALSO, if part of the value of the exchange property was section 1235 property, because the section 1235 portion of the new propery is not the same class, then the value the exchange would reduced, and you might still have to pay recapture on depreciation.
Recapture mahy still apply in your situation:
From the IRS frequently asked questions.
Recapture in 1031 Exchange. In §1031 exchange, , to the extent that there is gain to be recognized. then the 25% depreciation rate is applied to 1250 depreciation,.
They are talking about EXCESS depreciation, where accumulated depreciation exceeds the straight line method.
This is a tax trap, that you and other tax payers are rarely aware of.
The IRS rules indicate that there is normally no loss of gain on the exchange of lke kiknd properties if they meet the entire rules, even if you pay money. lHence there would not no loss carryover. The cost basis of the new property becomes the cost basis fo the old pluse hte orignal cost of the new properyt plus amoney paid.
So everyting is factored in.
What I would do in your situation, is ask the CPA to do a cost allocation study on the property, to make sure you are not paying recapture on things other than excess depreciation, and to reduce any recapture tax. you may benefit from that.
Here is a summary:
1. If any of the exchange inclouded an asset class not considered like kind, then there would be a gain, and the property may not qualify for a tax-less exchange, there for requireing depreciation recapture.
2. Even if it is otherwise a taxless exchange, you have to pay recapture on any excess dedprecation than it would have been under straignt line depreciation.
3. If you bought down on the exchange, that is the new property was less value, this will not be a tax-less exchange,and you will have to pay recapture tax on the current year tax return.
4. If you bougth up or at equal value, then you would in most instances be a taxless exchange and not have to incur a recapture tax at this time.
I have no idea why your CPA is saying you can not take depreciation on the acquired property.
The idea is that the cost basis of the old home is rolled over to the new home, so you continue depreication as if you still owed the old home. With the exception of paying recapture on excess depreciation, yiou continue to deprecdiate the old property as if you still owned it, AND you treat the new property as if it were an addtion to the old, depreciating its value. You seperately track the deprecaiton, for each as you will need to segregate the recapture tax when you dispose of the exchange property.
Agaiin the exception is if it is a trade down.