Terms and Definitions

PAD and Deferred Gains: In a 1031 exchange, previously accumulated depreciation (PAD) and deferred gain are important concepts to understand.

PAD: refers to the amount of depreciation that has been taken on a property over the years. When a property is sold, the accumulated depreciation must be recaptured and taxed as ordinary income. However, in a 1031 exchange, the accumulated depreciation can be deferred by using the proceeds from the sale to purchase a like-kind property. The deferred PAD reduces the basis of the new property, which means that any future depreciation deductions will be lower than they would be otherwise.

Deferred gain: refers to the gain that would be realized upon the sale of a property, but which is deferred by using the proceeds to purchase a like-kind property in a 1031 exchange. The deferred gain is not taxed at the time of the exchange, but is instead deferred until a future taxable event, such as when the new property is sold. At that point, the deferred gain will be realized and taxed at the appropriate capital gains rate.

Both PAD and deferred gain are important considerations in a 1031 exchange, as they can have significant tax implications for the parties involved. It is important to consult with a tax professional or qualified intermediary to fully understand these concepts and ensure that the exchange is structured in the most beneficial way possible.

Asset: Any property or equipment that is used in a trade or business, including buildings, fixtures, and personal property.

Basis: The original cost of an asset, including any improvements or additions made over time.

Bonus Depreciation: A tax incentive that allows businesses to immediately deduct a portion of the cost of qualifying assets in the year they are placed in service.

Capital Expenditure/Improvement: A cost incurred to acquire, improve, or extend the life of a long-term asset, such as a building or equipment.

Cost Segregation: The process of separating the costs of a commercial property into different asset classes for tax purposes, which allows for accelerated depreciation deductions.

Depreciation: The process of deducting the cost of an asset over its useful life, as determined by the IRS.

MACRS: The Modified Accelerated Cost Recovery System, which is the method the IRS uses to determine the depreciation deductions for most assets.

Personal Property: Tangible assets that are not considered part of a building or structure, such as furniture, equipment, or machinery.

Real Property: Land and buildings, including any fixtures that are permanently attached to them.

Recaptured Depreciation: The amount of depreciation that must be added back to taxable income when an asset is sold, due to the fact that the depreciation deductions were taken in previous years.

Section 1245 Property: Personal property that is subject to depreciation, such as machinery, equipment, or furniture.

Section 1250 Property: Real property that is subject to depreciation, such as buildings or structural components.

Useful Life: The period of time over which an asset is expected to be useful, as determined by the IRS.