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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I am a small tax preparer but have no experience with Form

Customer Question

I am a small tax preparer but have no experience with Form 8824, Like-Kind Exchanges. I have a client who is a sole proprietor and owns a trucking business. In 2012, he traded in several of his semi-trucks and utility trailers for newer ones. I read up and confirmed that these transactions would qualify as like-kind exchanges. I've read through the form 8824 and fill it out, one for each transaction, but I don't know if I need to do anything else after line 19 foward on Part III of the form. I read that these transactions are tax deferred but I also read that if property exchange was section 1245 (property that was depreciated, in which case old semi-trucks were depreciated for at least last year when he got them) then I may be required to recapture as ordinary income part or all of the realized gain. Help!
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.

Greetings,

 

There is not generally any recapture on such exchanges of 1245 property for 1245 property

 

"If non section 1245 property is received in a transaction with section 1245 recapture property, some gain due to recapture may apply. Refer to rules described in Reg. 1.1245-4(d)(4)." - See more at: http://www.gilaberttax.com/2013/02/28/10-section-1031-exchange-facts-you-need-to-know/#sthash.gfgt9AIs.dpuf

 

Please see the article with filled in examples at http://ruraltax.org/files/uploads/Like%20Kind%20Exchange%20Final.pdf

 

Also be aware that there is a choice to be made on how to enter the property received for depreciation purposes. From the linked article Example 2:

"Knight has two options when depreciating the replacement pickup. He can show two assets on his depreciation schedule. One is the remaining basis of the relinquished pickup using the remaining life and depreciation method on this truck and the boot (cash) paid for the replacement truck as a second asset. The second option is to treat the replacement truck as having a cost basis of $38,500 ($35,000 value of replacement truck plus $3,500 depreciation of old truck not utilized) and use the current required depreciation life and method for the truck."

 

Please ask if you need more discussion or clarification on this question.

Thank you.

Customer: replied 1 year ago.

so, I have read the attached articles on the links you sent me. Thank you for those. Correct me if I'm wrong, but what I now understand when applied to my client's situation is the following:


 


On 8/27/12, AJ Trucking traded in a 2008 Wabash Reefer Carrier for a 2009 Kenworth Tractor. The Bill of Sale reads as follows:


 


Selling Price on 2009 Kenworth is $49,000.


 


Trade in Allowance for 2008 Wabash Reefer $10,000


 


Doc Fee, Inspection Fee, Title, Transfer & License Fees $143


 


Cash Down Payment $12,143 (includes above fees)


 


Total Balance Due $27,000 (payments he has made on new replacement property)


 


Trade Difference or Total Cash Price Incl. Tax & Lic.: $39,143


 


 


For purposes of Form 8824:


 


Line 16: FMV Like-kind Property recieved = $49,143


(Total Cash Paid $39,143 (+) Allowed Trade-in Value $10,000= $49,143)


 


Line 18: Adjusted Basis of relinquished prop (+) Total Cash Paid =$51,143


 


 


(Adjusted Basis = Original Cost (-) Accumulated Depreciation = Remaining basis=$12,000)


(Adjusted Basis $12,000 (+) Total Cash Paid $39,143 = $51,143)


 


Line 19: $49,143 (-) $51,143 = <$2000>


 


Line 20-23: $0


 


Line 24: <$2000>


 


Line 25: $51,143


 


In this scenario, are the formulas/ computations correct and therefore, form 8824 filled out correctly?


 


FORM 4797 NEEDED?


If so, do I also need to fill out form 4797? How should I fill it out since the loss of $2000 can not be taken on a like-kind exchange?


 


DEPRECIATION SCHEDULE ENTRIES


If all the above scenario is correct and form 8824 has been filled out correctly, I can decide to just remove the old property from the schedule and add the replacement property with the new basis of $51,143 ($2,000 remaining depreciation on old property{$12,000 remaining basis - $10,000 trade in value} and the $49,143 value of replacement property)


Is this calculation correct?

Customer: replied 1 year ago.

What happens in the case of the following scenario?


 


AJ Trucking traded in a 2007 Kenworth Tractor for a 2007 Peterbilt Tractor on 8/22/12. He acquired the 2007 Kenworth Tractor in 01/01/2012 for $30,000. The trade-in value allowed for the 2007 Kenworth Tractor was $30,000. Since I'm preparing his 2012 tax return, the 2007 kenworth Tractor has not yet been depreciated. Can it be depreciated since he only kept it almost 8 months before he traded it in for the 2007 Peterbilt Tractor?


If I can depreciate it, will I enter two transactions, one for the 2007 Kenworth and one for the new replacement property, 2007 Peterbilt? Or will I enter only one transaction in the depreciation schedule, one for the 2007 Peterbilt and add the remaining basis of $30,000 to basis?


 

Expert:  jgordosea replied 1 year ago.

Hello again,

 

In your facts the line 16 is as you computed.

 

The amount given is the cash, loan payable and the basis remaining on the truck given.

In Example 2 from the link see line 18 which is the 15000 cash plus 23,500 basis given. The basis given and not the trade in credit is used in this computation.

 

You said 12143 plus 27000 loan was given and you add the remaining basis of the truck given to those for the line 18 amount on Form 8824.

This will usually also be the line 25 amount and that can be set up as one asset, as previously mentioned.

 

There is no MACRS depreciation allowed for an asset put in service and disposed in the same year. You will go through the same process on Form 8824 for this truck and can use that computed basis for the new truck.

 

Hope this clarifies for you; but ask if you still need help.

Thank you.

 

 

 

 

 

Customer: replied 1 year ago.

"In this scenario, are the formulas/ computations correct and therefore, form 8824 filled out correctly?"


According to your reply, I'm understanding the answer to this is yes. Therefore:


 


"FORM 4797 NEEDED?


 


If so, do I also need to fill out form 4797? How should I fill it out since the loss of $2000 can not be taken on a like-kind exchange?"


I read on another article that "Section 1031 exchanges must be reported even if no gain or loss is recognized....An exchange is reported as a disposition on either Form 4797 or Schedule D, whichever applies..."


Where should I report this "loss" on Form 4797? on what part of the form? Part I or Part III? How will this affect the return? In other words, by reporting it on 4797 I will only report the transaction, it won't allow me to take the loss, correct? How do I report this on form 4797 to correctly show this?

Expert:  jgordosea replied 1 year ago.

Hello again,

 

According to your reply, I'm understanding the answer to this is yes

Yes and no actually, see my comments on the line 18 amount not using the trade in credit but instead using the remaining basis of the relinquished asset.

"You said 12143 plus 27000 loan was given and you add the remaining basis of the truck given to those for the line 18 amount on Form 8824. "

This trade in is not treated quite the same as a 1031 exchange.

 

Since the gain or loss is deferred on the trade in there is not any gain or loss to report on Form 4797. Since the asset is disposed it will be on the 4797 with zero gain or loss. If needed adjust the "sales price" to result in zero gain or loss in your tax software or on the paper form. That is, the sales price is equal to the remaining basis on the date traded.

 

Hope this clarifies for you.

Thank you.

Customer: replied 1 year ago.

Since the asset is disposed it will be on the 4797 with zero gain or loss.



Where should it be showing on my 4797? What Part No on the form?

Expert:  jgordosea replied 1 year ago.

See http://www.irs.gov/instructions/i4797/ar01.html#d0e641

 

Use Part I to report section 1231 transactions that are not required to be reported in Part III.

 

Use Part III to figure recapture of depreciation and certain other items that must be reported as ordinary income on the disposition of property. Complete lines 19 through 24 to determine the gain on the disposition of the property.

 

From what you have said it could be in Part I.

It may also be listed by some software in Part III (if accelerated depreciation was claimed)

In any case there will be zero gain and no recapture so the either part can work.

 

Please know that although follow up is allowed, that site policy does dictate a new question be listed rather than using one thread to answer many questions.

 

Thank you for the opportunity to be of service.

 

 

 

 

 

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