Can I owe recapture in a 1031 exchange even if I take no cash?

The ceiling in §1245(b)(4) counts the replacement building against you, not for you

Read the limitation and the problem is visible on the page. Where gain is not recognized in whole or in part under section 1031, the ordinary income "shall not exceed the sum of — (A) the amount of gain recognized on such disposition ... plus (B) the fair market value of property acquired which is not section 1245 property."

Most exchangers assume clause (B) protects them. It does the reverse. Everything you buy that is not section 1245 property enlarges the ceiling, and an ordinary building, a DST interest in one, or a net-leased store is section 1250 property, not section 1245 property.

The only thing that lowers the ceiling is acquiring section 1245 property of your own. Buy a replacement carrying no section 1245 basis and the cap is effectively the whole purchase price, so the full section 1245 recapture is let through.

The IRS's own Form 8824 example recaptures $50,000 on a deal that produced $40,000 of cash

The Instructions for Form 8824 carry a worked example that makes the point better than any commentary. Taylor exchanges an apartment building worth $220,000 and receives a $250,000 building plus $40,000 cash, having previously allocated basis to assets that are section 1245 property.

In the variant where Taylor's section 1245 assets carried $50,000 of allowed or allowable depreciation, the instructions compute the limit as "$290,000, which is the total of ... $40,000 (Gain Recognized)" and "$250,000 (FMV non-section 1245 property received)." Taylor therefore reports the whole $50,000 as ordinary income — $10,000 more than the cash received.

Delete the $40,000 of cash from that example and the ceiling is still $250,000. The recapture is unchanged. That is the whole answer to this page's question.

Section 1250 is the mirror image, which is why nobody warns you about it

The same IRS example runs the section 1250 side for the other party, Finley, who had taken $35,000 of depreciation above straight line on qualified improvement property. The section 1250(d)(4) limit is "the greater of" the gain recognized or the excess of the potential recapture over the fair market value of section 1250 property received.

Finley's excess was "$0: ($35,000 ... reduced, but not below zero, by $165,000 (FMV Section 1250 property received))", so the ordinary income was held to the $30,000 of recognized gain and no further.

That asymmetry is the trap. Buying like-kind real estate shelters your section 1250 exposure automatically and does nothing at all for your section 1245 exposure.

Which slices of a cost segregation study are the §1245 ones

Not every line in the study is dangerous, and sorting them before you identify is the practical step.

Section 1245 property under §1245(a)(3) is personal property and certain non-building tangible property; it expressly excludes "a building or its structural components."

• 5- and 7-year items reclassified as personal property — carpeting, cabinetry, decorative lighting, dedicated equipment wiring — are the section 1245 exposure.
• 15-year land improvements such as paving, fencing and site lighting are section 1250 property, so they fall under the friendlier limit.
• Bonus depreciation on qualified improvement property creates section 1250 additional depreciation, which Form 4797 defines as depreciation "including any special depreciation allowance" above straight line.
• Structural components depreciated over 27.5 or 39 years carry no exposure at all on a straight-line schedule.
• Genuine personal property left in the building, such as appliances and furniture, is not like-kind at all and is separate boot.

Nothing about this disqualifies the exchange — Reg §1.1031(a)-3(a)(7) says so outright

It is worth being clear about what is and is not at risk, because owners often fear the whole exchange is unwinding.

The regulation states that "a structure or a portion of a structure may be section 1245 property for depreciation purposes and for determining gain under section 1245, notwithstanding that the structure or the portion of the structure is real property under this section", and that a taxpayer transferring section 1245 relinquished property "is subject to the gain recognition rules under section 1245 ... notwithstanding that the relinquished property or replacement property is real property."

So the deferral holds for everything else. Only the section 1245 slice changes character, and what does actually disqualify an exchange is covered separately.

What to ask for before day 45, and how to shop for §1245 basis

Because the fix is on the buy side, it has to happen before you identify rather than at tax time. Ask your CPA for the section 1245 basis and allowed-or-allowable depreciation on the property you are selling, expressed as one number.

Then ask each replacement for its purchase price allocation. A DST sponsor's offering documents and the trust's own cost segregation work, where it exists, will show how much of the acquisition price sits in personal-property-type assets, and that figure is what shrinks the ceiling. How to read a DST offering for this kind of detail is set out here.

Where the number is unavoidable, plan for the cash. Section 1245 recapture is ordinary income at your marginal rate rather than 25%, so it can cost more per dollar than the gain you are deferring, and a partial exchange that deliberately releases some cash is sometimes the cleaner answer. Confirm the allocation and the resulting tax with your CPA before you commit to a replacement.

Where it lands on the return: line 21, line 16, and the basis split on 25a and 25b

Form 8824 line 21 is captioned "Ordinary income under recapture rules. Enter here and on Form 4797, line 16", and Form 4797 line 16 is captioned "Ordinary gain or (loss) from like-kind exchanges from Form 8824." That is the whole path.

Line 23 then adds lines 21 and 22, and line 24 reports what remains deferred, so recapture recognized now reduces your deferred gain rather than adding to it.

Finally, lines 25a and 25b split your replacement basis between section 1250 and section 1245 property received, in amounts the instructions require to be "proportionate to their FMVs." Filling the form out for a straightforward exchange is walked through here.