The 1245 Exchange™ converts ordinary income recapture into capital gains — reducing your tax rate from 37% to as low as 15-20%.
When properties with prior cost segregation are sold, the IRS requires depreciation recapture — taxed as ordinary income at up to 37%. The 1245 Exchange reassesses the Fair Market Value of accelerated assets at time of sale, shifting a significant portion of the tax burden from ordinary income to capital gains (15-20%).
The result: permanent tax savings of $100K to $500K+ on most commercial property sales.
Understanding the Connection
Cost segregation accelerates depreciation during ownership — identifying building components that qualify for 5, 7, or 15-year depreciation instead of 27.5 or 39 years. This creates substantial tax savings year after year.
But here’s what most investors don’t realize: when you sell, the IRS requires you to “recapture” that accelerated depreciation — and it’s taxed as ordinary income, not capital gains.
That’s the problem 1245 Exchange solves. By reassessing what those assets are actually worth at time of sale, we can dramatically reduce the ordinary income recapture burden.
Most tax professionals understand depreciation recapture. Few have the engineering capability to minimize it.
The 1245 Exchange isn’t a tax loophole — it’s an IRS-compliant methodology that requires the same technical skill set used in cost segregation studies: engineering analysis, construction cost data, and Fair Market Value assessment of building components.
We utilize commissioned appraisal values to support asset condition and fair market value at the time of sale — avoiding generic assumptions or software-driven estimates.
Our studies follow the same rigorous standards as our cost segregation work, creating documentation that withstands IRS scrutiny.
Founded by construction professionals, we understand material degradation, functional obsolescence, and actual useful life — critical factors in FMV assessment.
If the IRS questions our valuation, we provide complete support at no additional cost — for life.
This strategy is essential for three groups involved in real estate dispositions:
Maximizing net proceeds on sales where cost segregation was performed.
Protecting investor returns across multiple dispositions.
Delivering comprehensive exit planning for real estate clients.
Timeline: 2-4 weeks (coordinate with closing date)
If a cost segregation study is already in place, we can leverage it at any time. If not, we should be engaged prior to sale to complete the study while access to the property is still available.
Typical timeline is 3–4 weeks from engagement to final report delivery. This includes reviewing the existing cost segregation study, performing the fair market value reassessment, and preparing the final deliverable. Rush engagements are available when timing is critical.
Yes — 1245 Exchanges are completed after the sale. If a cost segregation study has already been performed, we can proceed without issue. If not, the study would need to be completed before closing while the property is still accessible.
Since 1954, the IRS has distinguished between these two asset classes:
The way your sale’s purchase price is allocated between these classifications has significant tax consequences — potentially six figures of difference.
Typical timeline is 3-4 weeks from engagement to final report delivery. This includes data gathering, on-site inspection, engineering analysis, and report preparation. Rush studies are available when timing is critical (such as year-end tax planning or property sales). We’ve completed studies in as little as 2 weeks when needed.
Any commercial or residential rental property where cost segregation was previously performed qualifies, but properties with a basis over $1M provide the best benefit. This includes:
Absolutely. Our technology and processes are built to deliver accurate valuations at scale — from single properties to large portfolios. Real estate funds and syndicators managing multiple dispositions benefit significantly from our portfolio-level approach, which ensures consistency and maximizes investor returns across all exits.
While there’s no strict minimum, 1245 Exchange is typically most effective for properties with a basis over $1M and a hold period of 3–8 years.
We provide a free preliminary analysis to determine if the potential tax savings justify the study.
We rely on commissioned appraisal studies to establish fair market value for all assets at the time of sale. These appraisals consider asset condition, remaining useful life, and relevant market data to support a well-documented and defensible position.
This approach often shows assets have depreciated significantly beyond their original allocation — helping reduce recapture exposure.
Completely compliant. The 1245 Exchange follows established IRS guidelines for asset valuation at disposition. Our methodology is based on:
We’ve never had a 1245 Exchange study disallowed by the IRS, and we provide 100% no-cost audit support if any questions arise.
We deliver a comprehensive report that includes:
Everything your tax preparer needs for compliant tax reporting.
No problem. We can work with cost segregation studies from any provider. We’ll review the original study, obtain the asset detail schedules, and perform our FMV analysis based on that data. If the original study is missing key documentation, we can often reconstruct the necessary information.
We can work with depreciation schedules from your tax returns in many cases. If you know cost segregation was performed but can’t locate the report, we can often obtain it from the original provider or reconstruct the asset classifications based on available tax records.
Fees typically start at $3,000, depending on property size, complexity, and timeline requirements. However, the tax savings almost always exceed the cost by a 5:1 to 10:1 ratio or more. Our free preliminary analysis will show you the expected ROI before you commit.
Most clients save $85,000 to $250,000+ in recapture taxes — far exceeding the study cost. On a $500K recapture event, reducing the tax rate from 37% to 20% saves approximately $85,000. Larger properties with more accumulated depreciation can see six-figure savings.
Unlike temporary tax strategies that may reverse or phase out, a 1245 Exchange creates permanent tax savings by properly reclassifying assets at the point of sale. Once the property is sold and gains are realized, the tax treatment is locked in. The IRS can’t come back later and change capital gains to ordinary income — assuming the study was performed correctly with proper engineering support and documentation.
That’s why our engineering-based approach and comprehensive documentation are critical.
When you perform cost segregation during ownership, you’re accelerating depreciation — taking deductions earlier but not increasing total deductions over the property’s life. That’s a timing benefit.
A 1245 Exchange is different: it permanently reduces your tax liability by shifting income from the 37% ordinary rate to the 15-20% capital gains rate. That 17-22% rate differential is permanent savings — not timing. The money saved is never paid to the IRS.
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