Carryover basis: the starting point
In a 1031 exchange, your adjusted basis in the relinquished property carries over to the replacement. If your old property had $400K of remaining basis and you buy a $1.5M replacement, you start with $400K of carryover basis plus $1.1M of new 'excess' basis from the additional purchase price.
You generally continue depreciating the carryover basis on its original schedule and begin a fresh 39-year schedule for the excess basis.
Where cost segregation changes the math
A cost segregation study reclassifies qualifying components of the replacement property — interior finishes, partitions, dedicated systems, site improvements — from 39-year real property into 5, 7, or 15-year categories. Applied to a fully built-out property, this can move a meaningful share of the purchase price into schedules that depreciate in a fraction of the time.
With current bonus depreciation rules, some reclassified components may be deductible even faster. The exact percentages change with tax law, so confirm the current treatment with your CPA.
The practical takeaway
The exchange preserves your capital; depreciation shelters your new income. A replacement property with substantial interior buildout — like a finished executive office suite — gives a cost segregation study the most to work with, maximizing early-year deductions against the rental income you're now collecting.
A current example: Suite 200 at 599 Tamiami Trail N
This fully built-out executive office condo in the heart of Old Naples is offered at $1,500,000 with a 4.67% cap rate and $70,000 in net operating income. The tenant is in place on a lease running through 2029, so a buyer steps directly into stabilized income with no lease-up risk.
Fee-simple title, a prestigious downtown address, and a turn-key buildout make it a clean, quick close — important for anyone working inside a 1031 exchange timeline or placing capital before year-end.