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United States Tax Reporter P 1684.045

Internal Revenue Service (I.R.S.)

United States Tax Reporter (USTR)

P 1684.045 Depreciation of MACRS property acquired or relinquished in a like-kind exchange or involuntary conversion — overview.

Regs, explained at P 1684.046 et seq., provide rules for determining the depreciation allowance for MACRS property acquired in a like-kind exchange or an involuntary conversion, including a like-kind exchange or an involuntary conversion of MACRS property that is exchanged or replaced with other MACRS property in a transaction between members of the same affiliated group (see P 15,024.17) of corporations.  Treas. Reg. Section 1.168(i)-6(a).  These regs also provide rules for determining the depreciation, in the year of disposition, of property relinquished in a like-kind exchange or involuntary conversion.  Treas. Reg. Section 1.168(i)-6(c)(5)(i).

No depreciation deduction is allowable for MACRS property disposed of by a taxpayer in a like-kind exchange or involuntary conversion in the same tax year that the property was placed in service by the taxpayer.  Treas. Reg. Section 1.168(i)-6(c)(5).  If replacement MACRS property (see Treas. Reg. Section 1.168(i)-6(b)(1)) is disposed of by a taxpayer during the same tax year that the relinquished MACRS property (see Treas. Reg. Section 1.168(i)-6(b)(2)) is placed in service by the taxpayer, no depreciation deduction is allowable for either MACRS property.  Treas. Reg. Section 1.168(i)-6(c)(5).

For the depreciation of passenger automobiles involved in a like-kind exchange or involuntary conversion, see P 1684.047.  For how additional first-year depreciation (bonus depreciation) applies to MACRS property, or computer software, involved in a like-kind exchange or involuntary conversion, see P 1684.048.  For an election not to apply the regs explained above, see P 1684.049.

Property covered by the regs. If both MACRS and nondepreciable property are acquired in a like-kind exchange for, or as part of an involuntary conversion of, MACRS property, the basis allocated to the nondepreciable property — as determined under IRC Section 1031(d)  (see P 10,314.13) or IRC Section 1033(b) (see P 10,334.33) (and the regs under those Code sections) — isn't depreciated.  However, the basis allocated to the replacement MACRS property is depreciated in accordance with the regs explained at P 1684.046 et seq. Treas. Reg. Section 1.168(i)-6(d)(2)(i).

If MACRS property is acquired, or if both MACRS and nondepreciable property are acquired, in a like-kind exchange for, or as part of an involuntary conversion of, land or other nondepreciable property, the basis in the replacement MACRS property that is attributable to the relinquished nondepreciable property is treated as though the replacement MACRS property is placed in service by the acquiring taxpayer in the year of replacement. Thus, the depreciation allowances for the replacement MACRS property are determined by using the applicable recovery period, depreciation method, and convention prescribed by the MACRS rules for the replacement MACRS property at the time of replacement.  Treas. Reg. Section 1.168(i)-6(d)(2)(ii).

Observation: In other words, to the extent that, in a like-kind exchange or involuntary conversion, MACRS property replaces nondepreciable property, the MACRS property is depreciated under the 'regular' MACRS rules (P 1684 et seq.), instead of under the regs explained at P 1684.046 et seq.

Also, property acquired in a like-kind exchange or involuntary conversion to replace property whose depreciation allowance is computed under a depreciation system other than MACRS, or to replace property for which a taxpayer made a valid election to exclude it from MACRS (see P 1684), is not covered by the regs explained at P L-1684.046 et seq. Preamble TO TD 9115, 2/27/2004.  For an election that applies to certain property replacing property that a taxpayer elected to exclude from MACRS, see P 1684.0481.

The regs don't provide guidance for a taxpayer acquiring property in an exchange for property that the taxpayer depreciated under ACRS (see P 1688.400 et seq.) or for a taxpayer acquiring an automobile for another automobile for which the taxpayer used the Standard Mileage Rate method of deducting expenses (see P 1624.157). Preamble TO TD 9115, 2/27/2004.

Additionally, the regs don't apply to MACRS property to which the regs, explained at P 1684.06, concerning certain like-kind exchanges of tax-exempt-use property, apply. Treas. Reg. Section 1.168(i)-6(a).

Until further guidance is issued, taxpayers can apply the principles of the regs explained at P 1684.046 et seq. to determine the depreciation treatment of MACRS property acquired in multi-property transactions.  Preamble TO TD 9115, 2/27/2004.

Effect of depreciation by previous owners.

The depreciation treatment of the replacement MACRS property by previous owners has no effect on the determination of depreciation allowances for the replacement MACRS property in the hands of the acquiring taxpayer. For example, a taxpayer exchanging, in a like-kind exchange, MACRS property for property that was depreciated under ACRS by the previous owner must apply the regs explained at P 1684.046 et seq., because the replacement property will become MACRS property in the hands of the acquiring taxpayer. In addition, elections made by previous owners in determining depreciation allowances for the replacement MACRS property have no effect on the acquiring taxpayer. For example, a taxpayer exchanging, in a like-kind exchange, MACRS property that the taxpayer depreciates under the general depreciation system for other MACRS property that the previous owner elected to depreciate under the alternative depreciation system (ADS) doesn't have to continue using the ADS for the replacement MACRS property.  Treas. Reg. Section 1.168(i)-6(c)(2).

Code 179 expensing deduction.

In applying the expensing deduction under  IRC Section 179 to replacement MACRS property, only the excess basis (see Treas. Reg. Section 1.168(i)-6(b)(8)), if any, in the replacement MACRS property is taken into account.  This rule applies even if the replacement MACRS property is depreciable property that was acquired for nondepreciable property.  Treas. Reg. Section 1.168(i)-6(g).

Prior law

For like-kind exchanges and involuntary conversions for which either the time of disposition or the time of replacement occurred before Feb. 28, 2004,  a taxpayer was permitted to, but wasn't required to, apply the regs explained above.  Treas. Reg. Section 1.168(i)-6(k)(1)(i); Treas. Reg. Section 1.168(i)-6(k)(2) ; Treas. Reg. Section 1.168(i)-6(k)(2)(i).  Alternatively, a taxpayer could rely on earlier IRS guidance (for example, Notice 2000-4, explained below) for determining the depreciation deductions of replacement MACRS property or relinquished MACRS property involved in an exchange or conversion.  In relying on that guidance, a taxpayer could use any reasonable method of determining depreciation in the year of disposition and the year of replacement.  Treas. Reg. Section 1.168(i)-6(k)(2)(ii).

If a taxpayer filed its income tax return before Feb. 28, 2004, and the taxpayer had treated the replacement MACRS property as acquired, and the relinquished MACRS property as disposed of, in a like-kind exchange or involuntary conversion, the taxpayer could change its method of accounting for the depreciation of the replacement MACRS property and relinquished MACRS property in accordance with the provisions of the regs explained above, or in accordance with earlier IRS guidance, by following prescribed IRS procedures for changing accounting methods.  For further guidance, see P 4464.227. Treas. Reg. Section 1.168(i)-1(k)(2)(i); Treas. Reg. Section 1.168(i)- 6(k)(2)(ii).

For relinquishments or acquisitions of MACRS property, in a like-kind exchange or involuntary conversion, before Feb. 28, 2004 and after Jan, 2, 2000, taxpayers could rely on Notice 2000-4.  Preamble TO TD 9115, 2/27/2004.

Notice 2000-4 provided that MACRS property that was acquired for MACRS property in a like-kind property exchange to which IRC Section 1031 applies, or in replacement of involuntarily converted MACRS property in an involuntary conversion to which IRC Section 1033 applies, was depreciated in the same manner as the exchanged or involuntarily converted property for the portion of the taxpayer's basis in the acquired property that didn't exceed the taxpayer's adjusted basis in the exchanged or involuntarily converted property.  Thus, the acquired MACRS property was depreciated over the remaining recovery period of the exchanged or converted MACRS property, using the same depreciation method and convention as that of the exchanged or converted MACRS property.  However, any excess of the basis in the acquired MACRS property over the adjusted basis in the exchanged or converted MACRS property was treated as newly purchased MACRS property.  Notice 2000-4, 2000-1 CB 313 before obsoleted by Treas Dec 9115, 2/27/2004.

For the procedure which had to be followed if, for the first or second tax year ending after Jan. 3, 2000, a taxpayer was to receive consent to change from depreciating MACRS property acquired in a like-kind exchange or involuntary conversion as newly purchased property to depreciating the property under the above rules, see P 4464.225.

For MACRS property placed in service before Jan. 3, 2000, a taxpayer wasn't required to follow Notice 2000-4. Instead, the IRS allowed taxpayers to continue to use their present method of depreciating the acquired MACRS property, and the IRS treated that method as an allowable method of depreciation.  Thus, taxpayers that were depreciating MACRS property placed in service before Jan. 3, 2000 either (1) under  rules similar to those in Notice 2000-4, (consistent with Prop Reg Section 1.168-5(f)) or (2) as newly purchased property, could continue to do so.  Notice 2000-4, 2000-1 CB 313 before obsoleted by Treas Dec 9115, 2/27/2004.

END OF DOCUMENT

 

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