Like-kind exchange tax assumptions

Alerts and notices

When setting up a replacement asset for a like-kind exchange, the application determines if the replacement asset is a MACRS or a non-MACRS asset. The application makes this determination on a treatment-by-treatment basis. Note that the determination differs depending on whether or not the treatment follows IRS Notice 2000-4 or Reg. 1.168(i)-6.

You can specify whether or not each treatment follows IRS Notice 2000-4 or Reg. 1.168(i)-6 in Setup > Treatments > Treatment Options.

Treatment follows IRS Notice 2000-4

If the treatment follows IRS Notice 2000-4, the replacement asset is determined in the following ways.

  • If, after 1/1/87, you exchange an asset with a treatment that is depreciating using the MACRS, ACRS, Straight-line, 125% DB, 150% DB, or 200% DB method, the application assumes that you are acquiring a MACRS asset for the treatment.
  • If, at any time, you exchange an asset with a treatment that is depreciating using the Years Digits, Amortization, Units of Production, Memo, Land, or user-defined method, the application assumes that you are acquiring a non-MACRS asset for the treatment. The application sets up the treatment for the replacement asset with the same method of depreciation as the original asset.

Because IRS Notice 2000-4 applies only to MACRS replacement assets, the application sets up MACRS replacement assets for treatments that follow the Notice as aggregate assets that are comprised of component assets.

A component asset is set up for the following items.

  • The original asset.
  • Any components for the aggregate if you are exchanging an aggregate asset.
  • The amount of boot given for the exchange.

See an illustration of a like-kind exchange in which an aggregate asset is created according to Notice 2000-4.

For the like-kind exchange of an aggregate asset or for a mass trade, each treatment must calculate using either a MACRS or a non-MACRS method of depreciation throughout each component so that the application can set up the aggregate asset correctly. For example, in a mass trade you should not trade together an asset with a Tax treatment that depreciates using the MACRS method and an asset with a Tax treatment that depreciates using the Units of Production method.

Note: In a mass trade, standard mileage autos should only be traded with other standard mileage autos. Assets that are expensed using standard mileage are not considered MACRS assets.

Treatment follows Reg. 1.168(i)-6

If the treatment follows Reg. 1.168(i)-6, the replacement asset is determined in the following ways.

  • If, after 1/1/87, you exchange an asset with a treatment that is depreciating using the MACRS or ACRS method, the application assumes that you are acquiring a MACRS asset for the treatment.
  • If, at any time, you exchange an asset with a treatment that is depreciating using Straight-line, 125% DB, 150% DB, 200% DB, the Years Digits, Amortization, Units of Production, Memo, Land, or user-defined method, the application assumes that you are acquiring a non-MACRS asset for the treatment. The application sets up the treatment for the replacement asset with the same method of depreciation as the original asset.

Because Reg. 1.168(i)-6 applies only to MACRS replacement assets, the application sets up MACRS replacement assets for treatments that follow this regulation as aggregate assets that are comprised of component assets.

A component asset is set up for the following items.

  • The exchanged basis. This is the lesser of the basis in the replacement MACRS property, as determined under section 1031(d), or the adjusted depreciable basis of relinquished MACRS property.
  • Any components for the aggregate if you are exchanging an aggregate asset.
  • The excess basis. This is the difference between the basis in the replacement MACRS property, as determined under section 1031(d) and regulations under section 1031(d), and the exchanged basis.

See an illustration of a like-kind exchange in which an aggregate asset is created according to Reg. 1.168(i)-6.

Note: If you specify that the treatment does not follow Reg. 1.168(i)-6 in the Setup > Treatments > Treatment Options dialog and the trade occurs after 2/27/04, the application marks the Treat entire basis as a current year acquisition (Election 1.168(i)-6(i)) checkbox in the Disposal tab.

To elect to treat the entire basis as a current-year acquisition and make election 1.168(i)-6(i) on a trade-by-trade basis, mark the Treat entire basis as a current year acquisition (Election 1.168(i)-6(i)) checkbox on the Disposal tab. To apply separate passenger auto limits when electing out of Reg. 1.168(i)-6, open the Asset List window and mark the Apply separate passenger auto limits when electing out of Reg. 1.168(i)-6 checkbox in the Setup > Options > Calculation tab.

For the like-kind exchange of an aggregate asset or for a mass trade, each treatment must calculate using either a MACRS or a non-MACRS method of depreciation throughout each component so that the application can set up the aggregate asset correctly. For example, in a mass trade you should not trade together an asset with a Tax treatment that depreciates using the MACRS method and an asset with a Tax treatment that depreciates using the Units of Production method.

Note: In a mass trade, standard mileage autos should only be traded with other standard mileage autos. Assets that are expensed using standard mileage are not considered MACRS assets.

Treatment does not follow IRS Notice 2000-4 or Reg. 1.168(i)-6

If the treatment does not follow IRS Notice 2000-4 or Reg. 1.168(i)-6, the replacement asset is determined in the following ways.

  • If, after 1/1/87, you exchange an asset where the treatment is depreciating using either the MACRS or ACRS method, the application assumes you are acquiring a MACRS asset for that treatment.
  • If, at any time, you exchange an asset where the treatment is depreciating using the Straight-line, 125% DB, 150% DB, 200% DB, Years Digits, Amortization, Units of Production, Memo, Land, or user-defined method, the application assumes you are acquiring a non-MACRS asset. The application sets up the treatment for the replacement asset with the same method as the original asset.

Note: In a mass trade, standard mileage autos should only be traded with other standard mileage autos. Assets that are expensed using standard mileage are not considered MACRS assets.

Luxury autos, Van or light truck, and Electric autos

When a luxury auto, a van or light truck, or an electric auto is disposed of in a like-kind exchange, the auto depreciation limit for the first year of the replacement auto is applied to the sum of the current depreciation for the original auto and the replacement auto. When a single auto is exchanged for another auto, the limit is first applied to the original asset and then to the replacement asset. If the replacement asset's business use percentage falls below the original asset's business use percentage, the amount of the current depreciation on the original asset may need to be manually adjusted.

Note: You cannot dispose of Luxury autos, Van or light truck, or Electric autos through a like-kind exchange after 12/31/17.

Exception: When autos are traded in a mass disposition, no current depreciation is taken on the original autos. You need to enter the appropriate information in the Vehicle / Listed tab for the replacement asset. Then the full limit will be applied to the replacement asset from a mass disposition.

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