The short answer
You run two schedules, not one. Under Regulations section 1.168(i)-6 the exchanged basis, meaning the depreciable basis carried over from the property you sold, keeps that property's remaining recovery period, depreciation method and convention, while the excess basis, meaning everything you paid above it, is treated as new property placed in service in the year the replacement closed. Where the two properties have different lives, the longer of the two governs the carried half. One election on Form 4562 collapses both halves onto a single new schedule, and it is irrevocable.
At a glance
| Governing rule | Reg. §1.168(i)-6, effective for exchanges after February 27, 2004 |
|---|---|
| Exchanged basis | Lesser of the new §1031(d) basis or the old property's adjusted depreciable basis |
| Excess basis | The new basis above that, placed in service in the replacement year |
| Different lives | The longer recovery period of the two governs the exchanged basis |
| Real property terms | 27.5 years residential, 39 years nonresidential, straight line, mid-month |
| Election out | Reg. §1.168(i)-6(i)(1), one whole new schedule instead of two |
| How to elect | Statement on Form 4562: "Election made under section 1.168(i)-6(i)" |
| Election deadline | The return for the replacement year, extensions included; revocable only by ruling |
The regulation cuts your new basis into an exchanged half and an excess half
Regulations section 1.168(i)-6(b)(7) defines the exchanged basis as the lesser of two amounts: the basis in the replacement property figured under §1031(d), or the adjusted depreciable basis of the property you gave up. Paragraph (b)(8) makes the excess basis everything above that.
In practice the second definition wins on a trade-up and the first wins on a trade-down. Land is stripped out of both halves before either is depreciated, so a study or an assessor's ratio still has to split the replacement between dirt and improvements.
The figure being cut in two is the one Form 8824 line 25 produced, which is why the depreciation schedule cannot be written before that form is done.
The carried half finishes the clock the old building was already on
Paragraph (c)(1)(ii) of the regulation is direct: where the recovery period and method match, "the replacement MACRS property is depreciated over the remaining recovery period … and by using the depreciation method, of the relinquished MACRS property."
The Form 4562 instructions say the same in plainer words: depreciate the carryover basis over the remaining recovery period of the property exchanged, using the same method and convention, and figure depreciation separately for the carryover basis and the excess basis.
One consequence surprises owners of long-held rentals. A building placed in service in 2001 has roughly half a year of 27.5-year life left in 2028, so exchanging into a much larger property does almost nothing for the carried half of the deduction.
The method and convention travel with the period. Real property has always been straight line with a mid-month convention, so for a building-into-building exchange there is nothing to reconcile; the mismatch rules in paragraph (c)(4) matter when land improvements or cost-segregated components are in the mix.
Residential into commercial, and commercial into residential, are not symmetrical
When the replacement has the longer life, paragraph (c)(4)(i) treats it as though it had been placed in service on the day the old property was, but over the longer period. A 27.5-year rental exchanged into a 39-year building in its fifteenth year leaves about 24 years of 39-year life for the carried basis.
When the replacement has the shorter life, paragraph (c)(4)(ii) refuses the shortcut and keeps the old property's recovery period. Example 9 in the regulation walks a 39-year carried schedule straight into a residential replacement and depreciates it over the remaining 33 years, not 27.5.
That asymmetry is the practical argument for the election described below, because the only way to get the shorter 27.5-year life on the carried basis is to elect out.
The trade-up half is an ordinary new asset with an ordinary new first year
Paragraph (d)(1)(i) treats any excess basis as "property that is placed in service by the acquiring taxpayer in the year of replacement," using the recovery period, method and convention prescribed at that time.
For real property that means straight line over 27.5 or 39 years under §168(b)(3) and (c), with the mid-month convention of §168(d)(2), so a March closing yields nine and a half months of deduction in year one.
Only this half can carry a first-year bonus deduction on a used building, which is the reason any engineering study you commission is sized against that half of the basis.
A $560,000 basis after selling a 2011 rental: $8,660 plus $8,974
Hypothetical, round figures. A residential rental placed in service in June 2011 is exchanged in March 2026 for a commercial building. The rental's adjusted depreciable basis at closing is $210,000; Form 8824 line 25 gives $560,000 of improvement basis on the replacement.
The exchanged basis is $210,000 and the excess basis is $350,000. The replacement's 39 years is the longer period, so the carried half is treated as placed in service in June 2011 and has about 24.25 years left: roughly $8,660 a year.
The excess basis starts its own 39 years in March 2026, roughly $8,974 in a full year and about $7,100 in 2026 after the mid-month proration. Elect out instead and the entire $560,000 runs over a single fresh 39 years at about $14,359 a year, which is less, not more.
When electing out is worth an irrevocable choice
The election in paragraph (i)(1) treats the sum of the exchanged and excess basis as property placed in service at the time of replacement, and the old property as disposed of. It changes depreciation only: the regulation states that it "does not affect the application of sections 1031 and 1033" or of §§1245 and 1250.
It earns its keep when the carried schedule is longer than the replacement's own life, the commercial-into-residential case, and when a landlord with five inherited schedules wants one. It costs you when, as in the example above, the carried schedule has fewer years left than a fresh one would.
Mechanics to diary: one election per exchange, made by the partnership, S corporation or consolidated parent rather than by the owners, on a timely filed return including extensions, by attaching a statement reading "Election made under section 1.168(i)-6(i)" for each property. Revocation needs a private letter ruling.
- Elect out when the replacement is residential and the carried schedule came from a 39-year building.
- Elect out when the carried basis is small enough that a second schedule costs more in fees than it saves.
- Stay with the default when the carried schedule is nearly exhausted, because those years are worth more now than spread over 39.
- Nothing is deductible between the two closings: paragraph (c)(5)(iv)(A) suspends the recovery period during the gap in a deferred exchange.
- Inside a Delaware statutory trust the same split applies to your share, and the sponsor's land and improvement allocation feeds it.
Related questions
Do I really have to keep two schedules for the next 30 years?
Until the carried half is fully recovered, yes. After that only the excess basis schedule remains, and it runs to the end of its own 27.5 or 39 years.
I bought two replacement properties. How does the split work then?
Allocate the total basis across the properties by relative fair market value first, then cut each property's share into exchanged and excess basis. Each replacement ends up with its own pair of schedules.
Does electing out let me start the whole basis over at 27.5 years on a residential replacement?
Yes, that is exactly what Example 9 of the regulation illustrates, and it is the strongest reason to make the election. It is irrevocable, so run both schedules before the return is filed.
My exchange closed in December and the replacement in February. Which year gets the deduction?
Neither gets the gap. Depreciation stops on the old property at the time of disposition and the replacement's recovery period is suspended until you take title, so the February year picks it up.
What happens to the old property's remaining basis if the exchange produced a loss on paper?
Nothing is written off. Section 1031 does not recognize losses, so the basis carries into the replacement and keeps depreciating; whether to exchange at all when you are selling at a loss is a different decision.
Can I just use the replacement's purchase price and forget the old schedule?
Only if you elect out, and even then the basis is the carried figure plus what you added, not the purchase price. Depreciating the full price would deduct the deferred gain twice; confirm the schedule with your CPA before it is filed.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.