Like-Kind Exchanges and Involuntary Conversions Overview
A like-kind exchange is a type of disposal that occurs when two parties exchange assets that are similar in nature. The exchange can include the receipt of money or other dissimilar property.
For assets exchanged on 1-3-2000 and later IRS rules state the newly acquired asset "steps into the shoes" for depreciation purposes of the asset you give up. If cash or its equivalent ("boot") is paid at the time of the exchange, the newly acquired asset is depreciated as if it were two separate assets:
- Asset #1: This asset continues the asset given up in the exchange. It has the same placed-in-service date, acquired value, averaging convention, and recovery period as the exchanged asset.
- Asset #2: This asset is treated as a new asset received in the exchange. It has an acquired value equal to the basis in the new asset less the adjusted basis in the original asset. (Generally, this is the amount of any boot paid.) The new asset’s placed-in-service date is when the exchange occurred. Assign this asset an appropriate depreciation method and a new recovery period starting with its new placed-in-service date.
If no boot is paid, the newly acquired asset is depreciated as a single asset with the same attributes as Asset #1 above.
Post-2017 exchanges: Personal property versus real property
For exchanges occurring in 2018 and later, Like-Kind Exchange treatment for tax purposes is no longer applicable to personal property unless:
(1) the relinquished property was disposed on or before December 31, 2017; or
(2) the replacement property was acquired on or before December 31, 2017.
In summary, for exchanges occurring in 2018 and later, generally use:
- the Like-kind Exchange: Post 1/2/2000 disposal method for real property, and
- the Taxable Exchange disposal method for personal or amortizable property.