Like Kind Exchange Please Help

[cpabsd]

Client traded equipment with net book value of $7084. Trade value given was 22,000. New equipment FMV is $57,600 witn loan of $35,600. Recognized gain is 14,916 and I believe captialized value of new equipment should be $42684. I cannot get asset entry to allow equipment to be captialized at this amount. How should it be input? Please help. I need to get done immediately. There seems to be no where that I am to input the loan on the new piece of equipment. There was no loan on the old equipment.

[jainen]

>>no where that I am to input the loan <<

New loans are irrelevant in a 1031 exchange, unless one party is ASSUMING an existing loan.

There are two ways to figure the basis for the new property. Either subtract deferred gain (14916) from acquisition cost (57600), or add old basis (7084) to additional money needed (35600) regardless of the source. Both ways show the same result of $42684.

Be sure this actually IS a 1031 exchange. Like kind is defined very narrowly for equipment--it must be in the same general asset class or same product class. Also, be careful of your terminology. The $14916 is "realized gain," not "recognized." And once again, ignore the loans in a 1031 exchange.

[cpabsd]

Thanks Jainen. I knew the difference between realized and recognized just wrote the wrong word. I believe I have to manually input the new asset in Asset entry. The two pieces of equipment were both skidloaders so like kind exchange is permissible I believe.

[OldJack]

>>How should it be input?<<

With ATX software:

One way is to show the old equipment as a sale/disposition at book value with no gain/loss, then enter the new asset at the full value of the additional purchase price (loan) plus the net book value of the old. Note that the net book value does not qualify for sec. 179.

The other way is to leave the old asset on the books and continue with depreciation. Then add the new asset at the loan price and depreciate. Personally I do not like that method.

[Bart]

The other way is to leave the old asset on the books and continue with depreciation. Then add the new asset at the loan price and depreciate. Personally I do not like that method.

Why do you not like that method?

[OldJack]

>>Why do you not like that method?<<

Because it leaves an asset on the depreciation schedule that has really been sold. And if the new asset is sold you have to remember to also deal with the disposition of the old asset when many other assets may have been purchased on lines between the old and new. Its just a detail to keep track of especially if you have several such items on the depreciation schedule over several such years.

[jainen]

>>it leaves an asset on the depreciation schedule that has really been sold<<

Technically speaking, this is the standard procedure (although the name of the asset is usually changed to something like "exchange basis"). You have to make an election to combine the exchange basis and the new basis into a single asset.

The disadvantage, as OldJack says, is extra complexity. The advantage is that the old exchange basis can be written off faster than the new basis. Suppose for example bsd's equipment was seven year property and the old one had only one year left. That last $7084 can be deducted in full on the old schedule. Otherwise, the $7084 would have to be deducted over seven years just like the rest of the new basis.

There are special rules for when the new asset is required to be depreciated on a different schedule, like trading a residential rental for commercial property.