Calculating Depreciation on a Like-Kind Exchange or an Involuntary Conversion—footnotes

¹ See TD 9115 (2/27/04).

² The tables are found in Rev. Proc. 87-57, 1987-2 CB 687, amplified and clarified by Rev. Proc. 89-15, 1989-1 CB 816.

³ The new regulations only apply to modified accelerated cost recovery system (MACRS) property acquired in a Sec. 1031 exchange or a Sec. 1033 conversion. They do not apply to accelerated cost recovery system property relinquished in a like-kind exchange or in an involuntary conversion. The regulations also do not provide guidance on the determination of the depreciation allowance for the period the property is held by a qualified intermediary.

⁴ Notice 2000-4, 2000-1 CB 313.

⁵ For a complete discussion, see Mason, Levy and Levy, “Depreciation of Like-Kind Exchange Property after Notice 2000-4,” 32 The Tax Adviser 398 (June 2001).

⁶ See note 2, supra.

⁷ Although it is now common to rely on technology to manage the depreciation calculations, tax advisers bear the responsibility to review and verify them. It is not uncommon to make manual adjustments, given the complexity of the computations and the programming limits of certain technology.

⁸ See note 2, supra.

⁹ In most cases, the disposal and the replacement occur in the same year. If so, the depreciation for the year is effectively split between the relinquished and the replacement properties. If the replacement property is not acquired until a subsequent year, the half-year convention will apply to that year; see Temp. Regs. Sec. 1.168(i)-6T(c)(5)(ii)(A).

¹⁰ See Temp. Regs. Sec. 1.168(i)-6T(e)(2)(ii)(B)(2).

¹¹ See Temp. Regs. Sec. 1.168(i)-6T(e)(4), Example (1).

¹² This rule does not apply to provisions that limit the depreciation deduction, such as the Sec. 280F limits on luxury automobiles.

¹³ Exchanges of property with different recovery periods from those used in this example may generate different results.

¹⁴ If a different convention (i.e., mid-quarter) were in effect, the depreciation would be allocated based on the applicable convention.

¹⁵ If the replacement and relinquished properties are subject to the same MACRS life and method, the only difference between the two approaches will be due solely to the transaction coefficient approach’s lack of adjustment to the exchanged basis for the exchange year.