depreciable, and RECPER is the allowable cost recovery period for the existing property.
Total taxes due on the sale of the relinquished property at time t are therefore expected to
be
TDS = TcgCG + TdrRECAlP (10)
The second acquisition option available to the taxpayer is to take advantage of
Section 1031 and exchange into the replacement property. The net present value of the
exchange strategy, assuming all-equity financing, can be represented as
NPVEX 1 EC 2 (- oDEP2,e pt2 n-SC2 cgCG,2- p p2,e
NPVEXt = t -(ECI -k)( +k)
=1 (1+k)j (1+k)"
(11)
where:
EC = the total cost of exchanging out of the relinquished property and
into the replacement property at time t;
DEP"2, = depreciation on the replacement property in year i, conditional on
an exchange strategy;
CG2 = the expected capital gain income on the sale of the replacement
property in year t+n, conditional on an exchange strategy; and
RECAP2,e = depreciation recapture income on the sale of the replacement
property in n years assuming an exchange at time t.
All other variables are as previously defined. The capital gain and recapture
components of the total taxable gain on the sale of the replacement property at time t+n,
conditional on an exchange strategy are
CG 2,e(P2 -SC2 )-UNDBASIS2,e (12)
and
RECAP =iDEP2 (13)