The Depreciation Trap: What Real Estate Influencers Won’t Tell You About STR Tax Strategy
Post 7: What If You 1031 or Never Sell?
DISCLAIMER: While I can read the language of the text and my wife and I fall under the short term rental exception and material participation so our outcome might be different, I am not a CPA or Tax Attorney. Everyone's situation is different, but this is a review of tax law considerations that many laypeople assume apply—often without confirming with legal experts or tax advisors.. Before assuming you are making a good financial decision using much discussed tax strategy in real estate, consult your advisors. The outcome is not always as a simple mind would want to believe. Again, this is not tax advice—just an academic review of the written word.
📘 Post 7: What If You 1031 or Never Sell?
The Forever Hold Strategy and the Estate Step-Up
🧳 The “Never Sell” Plan
By now we’ve walked through:
How depreciation works
How recapture happens
How passive losses get trapped — and sometimes freed
How your capital gains can get recharacterized and taxed at ordinary rates
So now you may be thinking:
“Fine. I just won’t sell.”
“Or I’ll 1031 it over and over until I die.”
You wouldn’t be the first to say it — and in fact, you wouldn’t be wrong.
There is a playbook for this. It’s called the Forever Hold Strategy.
Estate Planning and Tax Planning, however, are not the same thing.
🔁 The 1031 Exchange: Kick the Tax Can
The first lever in the strategy is the IRC §1031 Like-Kind Exchange.
Here’s what it does:
Allows you to sell an investment property and defer all gain — including depreciation recapture — as long as you reinvest into a qualifying replacement property of equal or greater value.
It’s the “roll it forward” method.
You don’t pay the tax.
You don’t trigger the recapture.
You just buy again.
Do this enough times, and you’ve effectively built a tax-free wealth ladder on the back of depreciation — without ever facing the bill.
⚰️ The Final Move: Die Holding
The second — and most powerful — lever is what happens when you die.
Under current law, when your heirs inherit property, they receive a step-up in basis to fair market value at the time of death.
Which means:
All depreciation you ever took
All the recapture that was looming
All the capital gain you were deferring
🧨 It all disappears.
The new basis is fair market value.
Your heir could sell the next day and owe nothing.
This is where depreciation becomes true tax-free wealth — but only if you hold until death.
🧠 Why the Forever Hold Works (If You Stick to It)
Strategy StepEffectClaim depreciationReduce taxable income now1031 into new propertyDefer all tax on gains and depreciation recaptureRepeat until deathDefer taxes indefinitelyDie holding the assetReceive full step-up in basis — no recapture owed
But here’s the problem...
🧨 Famous Last Words: “I’ll Never Sell”
Here’s what breaks this strategy:
You 1031 two or three times… then get tired
You need liquidity for retirement
You want to simplify your estate
You want out of the headaches
You lose interest, or life throws a curveball
And then — you sell.
And everything comes due.
All the deferred recapture.
All the deferred capital gain.
All the depreciation you front-loaded comes roaring back — with interest.
The Forever Hold works only if you actually hold forever.
👨👩👦 Estate Strategy ≠ Tax Strategy
A lot of STR owners don’t realize:
1031 exchanges complicate estate planning
Multiple properties across states create probate headaches
Gifting or selling partial interests can trigger unintended taxes
Holding property until death reduces liquidity at a time when cash may be needed
This strategy is elegant on paper.
In real life, it requires discipline, control, and estate support.
📌 Summary: Yes, You Can Escape Recapture
You can 1031 over and over.
You can die holding.
You can avoid depreciation recapture forever.
But you must be committed. Ok so that is a process. The idea is was the initial kick of accelerated or bonus depreciation worth it? Did the property actually throw off positive cash flow for you while generating depreciation led losses for tax in the following years? Did you do this over and over and over again a build a portfolio of real estate that you could not enjoy? or does the enjoyment of passing on this estate give you pleasure? It can and it might and it could or it should, but we are not all wired the same way. As Denzel Washington Reminds us here:
Bonus depreciation becomes truly tax-free only if you play the long game — and play it perfectly.
🧩 Coming Next in the Series…
Post 8: What If You Can Use the Loss? Real Estate Professionals and the Power of Participation
Not every investor is passive.
If you’re in real estate full time — or materially participate — you may be able to use bonus depreciation right now, against W-2 or active income.
We’ll walk through how to qualify and how the math works when the loss isn’t suspended.