Depreciable Basis of New Assets & Like Kind Exchanges

Beginning with assets placed in service after February 27, 2004 the IRS now allows a choice in calculating the depreciable basis for an asset acquired in a like-kind exchange. Since January 3, 2000 the calculation of the depreciable basis for an asset acquired in a like-kind exchange was outlined in Notice 2000-4. It stated that any cash or “boot” paid to acquire the new asset would be the new basis for depreciation. Any carryover basis (remaining basis) in the traded asset would continue to be depreciated over the remaining life of the traded asset as if it was still on the farm. This created “phantom assets” on the depreciation schedule; assets still being depreciated, but that were no longer in the possession of the producer.

For assets placed in service after February 27, 2004 a taxpayer can make an election out of Notice 2000-4 under Temporary Regulation § 1.168(i)-6T. This election allows the basis remaining in the traded asset to be rolled into the new basis of the acquired asset that is then set up on a new depreciation schedule. The election out of Notice 2000-4 is similar to the “old” way of calculating depreciable basis prior to January 3, 2000 ; the basis of the new asset is the boot money paid plus any basis remaining in the traded asset. However, electing out means that a partial year’s depreciation is claimed on the traded asset in the year of the trade to determine its remaining basis.

An example: A new tractor is acquired on July 1, 2004 for $20,000 plus the trade of another tractor with a remaining basis of $24,502 that had been acquired in 2001 and had an original basis of $50,000. Under Notice 2000-4, the total MACRS depreciation for the new tractor would be the new basis depreciation of $2,142 ($20,000 * 10.71%) plus the carryover basis depreciation of $6,125 ($50,000 * 12.25%) or $8,267. Electing out of Notice 2000-4 gives a new depreciable basis of $44,502 and total MACRS depreciation of $4,766 (($20,000 + $24,502) * 10.71%) for the new tractor plus $3,063 ($50,000 * 12.25% * ½ yr.) for the traded tractor or $7,829. Election out of Notice 2000-4 will result in a smaller amount of deprecation in the year of acquisition if the traded assets have any remaining basis. There is no difference in deprecation of the new asset in the acquisition year if the traded assets are depreciated out.

The election is made by attaching a statement indicating “Election made under section 1.168(i)-6T(i) to Form 4562, Depreciation and Amortization. Check with your tax adviser to see what is the best strategy for your situation.

Leave a Reply

Your email address will not be published. Required fields are marked *