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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10131
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Do I record depreciation on the books commercial building

Customer Question

Do I record depreciation on the books for a commercial building that was received in a Section 1031 exchange? The book basis is $2,000000 and the tax basis is $35,000. Thank you
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Depending on your objective, no, not generally.

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In most respects, the company maintains records for its own use, called book accounting, that largely use the same data as accounting for taxes for tax purposes ( tax accounting ).

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This is one of them.

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You must continue to record depreciation, for TAX purposes, in order to correctly show gain when the property is ultimately sold, (The basis, as it appears has been done here) follows into the replacement property in a 1031 exchange.

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You may treat assets differently, making adjustments for tax purposes, (to take advantage of tax savings), but the book value of assets is adjusted in ways that meet other accounting guidelines or reporting needs for the company. (Management generally uses "book" to reflect the true physical life of assets, for example.

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Inventory valuation, and treatment of maintenance and repairs typically drive much of the differences. For some organizations maintaining a separate ledger to record the different depreciation rates and bases, makes sense. For example, in book accounting, a company might use straight-line depreciation to reduce the value of an asset over its useful life of 10 years. For tax purposes, this might be a 7 or 5 year asset, resulting in a tax benefit for the company *(and another depreciation method to track).

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So, with a commercial building, tracking only tax (essentially having book BE your tax deprecation) might make sense ... there is no rule here (on the management side).

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The tax computations MUST be continued.

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Let me know if you have questions

Expert:  Lane replied 1 year ago.

The reason to track separately would be to more accurately show the real net worth (as the property actually - typically - appreciates in value.

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But the BOOK accounting standard is to recod at cost, anyway... so market valuation os really only pertinent to gain