Case Study: Scaling a Rental Portfolio With Cost Segregation & 1031 Exchanges

The situation

Renee had owned a rental property for six years that had appreciated significantly and also carried several years of accumulated depreciation. She wanted to sell it and roll the proceeds into a larger property, but was worried that both the capital gain and the depreciation recapture would eat a large chunk of her equity before she ever got to reinvest it.

What we did

• Structured the sale as a 1031 exchange instead of an outright sale, deferring both the capital gain and the depreciation recapture into the replacement property
• Identified replacement property within the 45-day window and closed within the 180-day exchange period, working backward from those deadlines from day one
• Commissioned a cost segregation study on the new, larger replacement property to accelerate depreciation on the stepped-up basis
• Coordinated the new depreciation schedule with her existing real estate professional status to make sure the fresh losses would actually be usable against her active income, not suspended

The numbers

The result

The 1031 exchange didn't eliminate any tax — it deferred a real gain and real recapture into the replacement property's basis, which matters for exit planning later. Layering a fresh cost segregation study onto the new property after the exchange gave Renee a new round of accelerated depreciation on top of that deferral, which her existing REPS qualification let her actually use immediately rather than watch sit suspended.