Depreciation of property acquired subject to secs. 1031 and 1033.
Notice 2000-4 states, "the acquired MACRS property should be treated in the same manner as the exchanged or involuntarily converted MACRS property with respect to so much of the taxpayer's basis in the acquired MACRS property as does not exceed the taxpayer's adjusted basis in the exchanged or involuntarily converted MACRS property. Thus, the acquired MACRS property is depreciated over the remaining recovery period of, and using the same depreciation method and convention as that of, the exchanged or involuntarily converted MACRS property. Any excess of the basis in the acquired MACRS property over the adjusted basis in the exchanged or involuntarily converted MACRS property is treated as newly purchased MACRS property."
Example: T purchased a rental office building for $630,000 on Jan. 1, 1990. The building was depreciated using the straight-line method over a 31.5-year recovery period. (Disregard the mid-month convention for this example.) On Jan. 1, 2000, when the building had $200,000 of accumulated depreciation and a remaining recovery period of 21.5 years, the taxpayer exchanged the building and $195,000 cash for a new rental office building in a transaction subject to Sec. 1031. T's basis in the new building is $625,000 ($630,000 cost of the surrendered building, minus $200,000 accumulated depreciation, plus $195,000 cash paid).
Based on Notice 2000-4, T should essentially treat the newly acquired building as two assets in calculating depreciation. One asset is the old building, with an adjusted basis of $430,000, which should be depreciated using the straight-line method over the remaining 21.5-year recovery period. The other asset is a newly purchased building, with a basis of $195,000 (cash paid), which should be depreciated using the straight-line method over a 39-year recovery period. Depreciation in 2000 will be $25,000 ($430,000 basis depreciated over 21.5 years plus $195,000 basis depreciated over 39 years). If T treated the building as newly purchased MACRS property and depreciated, the net basis of $625,000 over 39 years, his 2000 depreciation would be only $16,026.
T will claim the same total depreciation, regardless of method, if he holds the newly acquired building for 39 years. However, depreciating the property according to Notice 2000-4 accelerates depreciation over that allowed for newly purchased MACRS property. In addition to accelerating the deductions, Notice 2000-4 provides other tax-saving opportunities. First, the additional depreciation claimed as an ordinary deduction is converted to capital gain (unrecaptured Sec. 1250 gain) if T disposes of the property in a taxable transaction before the end of the 39-year period. Second, if T dies within the 39-year period, any basis step-up will be increased.
If acquired property subject to Sec. 1031 or 1033 was placed in service before Jan. 3, 2000 and a taxpayer treated it as newly purchased MACRS property (rather than according to Notice 2000-4), the taxpayer may continue this treatment. However, a taxpayer presently depreciating such property as newly purchased MACRS property may change to the depreciation method described in Notice 2000-4, provided the change is made for the first or second tax year ending after Jan. 3, 2000. Thus, a calendar-year taxpayer may change methods in either 2000 or 2001.
A change from treating property as newly purchased property to that described in Notice 2000-4 is an accounting method change to which Secs. 446 and 481 apply. A taxpayer changing the method of accounting for property acquired subject to Sec. 1031 or 1033 must follow Rev. Proc. 99-49's automatic change in accounting method provisions, provided the taxpayer makes the change in method for the first or second tax year ending after Jan. 3, 2000 and takes into account any required Sec. 481(a) adjustment in accordance with Rev. Proc. 99-49.
For property placed in service after Jan. 2, 2000, a taxpayer should use the method described in Notice 2000-4 until regulations under Sec. 168 are issued to address these transactions.
FROM KATHLEEN K. MARTIN, MADISON, WI
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|Title Annotation:||Internal Revenue Code|
|Author:||Martin, Kathleen K.|
|Publication:||The Tax Adviser|
|Date:||Apr 1, 2000|
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