Depreciate Property in Like-Kind Exchanges Consistently

Why practitioners must give special scrutiny and apply new depreciation matching rules.

November 2008
by Michael Stevens/Journal of Accountancy

The Treasury has issued final regulations (Treasury Decision 9314) explaining how to depreciate modified accelerated cost recovery system (MACRS) property that has been acquired in a section 1031 like-kind exchange or through a section 1033 involuntary conversion when both the acquired and relinquished property are subject to MACRS in the hands of the acquiring taxpayer. The regulations apply to all such exchanges, including those between members of the same affiliated group. However, the regulations do not apply to like-kind exchanges of tax-exempt-use MACRS property under Treas. Reg. § 1.168(h)-1. See also Treas.
Reg. § 1.168(i)-6(a).

The regulations are a response by the IRS to the inconsistent depreciation treatment by taxpayers of property that has a basis determined under section 1031(d) or section 1033(b) (replacement property). Certain taxpayers were depreciating the replacement property using the same depreciation method, recovery period and convention as the exchanged or involuntarily converted property (relinquished property), while other taxpayers were depreciating the replacement property as if it were newly placed in service.

The final regulations retain the rule in proposed regulations that the properties involved must be MACRS properties. It did not, as one commentator urged, extend the treatment to other types of property because "it is anticipated that the vast majority of like-kind exchanges and involuntary conversions occurring after the effective date of the final regulations will involve the exchange of MACRS property."

This article has been excerpted from the Journal of Accountancy. Read the full article here.