Our cpa nyc office provides tax advice for freelancers and self-employed individuals. As a taxpayer involved in a like-kind exchange or who replaced property after a casualty loss, regulations concerning the annual depreciation allowance for the replacement property may be of interest to you.
Under a typical like-kind exchange, a taxpayer sells property to be exchanged to a buyer, the proceeds are transferred to and held by an intermediary, and the taxpayer acquires replacement property from an unrelated seller using the funds held by the intermediary. Like-kind exchanges offer enormous tax planning opportunities by allowing the taxpayer to reinvest proceeds from the sale of qualified business or investment property without recognizing gain. Although a like-kind exchange is often referred to as being tax free, the exchange is more appropriately tax deferred because the basis of the relinquished property is carried over to the replacement property.
Similarly, nonrecognition of gain from an of property is mandatory if the old property is converted directly into similar property, and elective if the taxpayer receives money, such as insurance proceeds, or other nonqualified property, and acquires qualified replacement property within the prescribed time period. If the old property is exchanged for replacement property, the basis of the old property carries over to the replacement property, thereby deferring unrecognized gain until the disposition of the replacement property.
Until its disposition, the replacement property must be depreciated according to regulations. The computation of the depreciation allowance depends, in part, on whether the recovery period and depreciation method of the relinquished property and replacement property are the same. In some cases, application of the regulations has an adverse tax effect. Fortunately, a taxpayer may elect out of the regulations. This election should be considered if the recovery period of the replacement property is shorter than the remaining recovery period of the relinquished property, or the depreciation method of the replacement property is more accelerated than the depreciation method of the relinquished property.
The most beneficial method for depreciation should be determined and applied to your replacement property. Even if the replacement property was acquired in a prior tax year, it may be to your advantage to amend the return and elect out of the regulations if the property can be depreciated more quickly. We can prepare the computations and discuss your options. Please give our nyc cpa office a call at your earliest convenience.