Yes. A 1031 exchange defers the gain and the recapture that rides on it, and the 2020 like-kind exchange regulations removed most of the anxiety that cost segregation once created around exchanges. Two genuine wrinkles remain.
Real property for 1031 is not the same test as MACRS class
Since the Tax Cuts and Jobs Act, IRC section 1031 applies only to real property. The old fear was that a study, by reclassifying part of the building into 5- and 7-year personal property, had converted that slice into non-exchangeable assets. The final regulations at Reg 1.1031(a)-3, issued in 2020, answer this directly: whether property is real property for section 1031 is determined under the exchange rules themselves, not by its depreciation classification. Inherently permanent structures and their structural components are real property for exchange purposes even while they depreciate as 5-year or 15-year property. A cost-segregated building still exchanges as real estate.
Where recapture can still leak through
IRC section 1245(b)(4) limits deferral of section 1245 recapture in an exchange to the extent the replacement carries matching section 1245 potential. If the relinquished property was heavy with short-life components and the replacement is nearly all shell and land, the mismatch can push some recapture into the sale year. The practical answer is to exchange into property of comparable character and run a cost segregation screen or study on the replacement, which both documents the short-life content and restarts deductions on any new basis above the carryover.
The second wrinkle is boot. Actual personal property transferred with the deal, the furniture package in a short-term rental sale is the classic case, is not real property and is taxable boot to the extent of gain. The incidental personal property rule in Reg 1.1031(k)-1(g)(7) keeps small amounts, up to 15 percent of the replacement property's value, from breaking the exchange structure, but it does not make the boot tax-free.
What carries into the replacement property
Deferral means the basis, the depreciation history, and the recapture potential all roll forward. Under Reg 1.168(i)-6, the exchanged basis generally keeps depreciating on the old schedule, while only new money added gets a fresh schedule. Sell the replacement in a taxable sale later and the deferred recapture comes due. The long game is the familiar one: keep exchanging, and the basis step-up at death under IRC section 1014 extinguishes the deferred recapture entirely.
Amadae's cost segregation screen can model both ends of an exchange, the recapture being deferred on the relinquished property and the fresh short-life basis on the replacement, and Amadae prepares the Form 8824 and depreciation carryover schedules when it files the return. The screen is a screening estimate, not an engineering study, but it keeps the exchange math honest before the 45-day clock starts.