Business Asset that was traded in

[Liz55]

I have a boat that was used 100% for business.  I traded it in for a new one.  I read that you cannot take a like-kind exchange as of 2018.  The boat that was traded in cost $64,000, depreciation was approximately $40000.  I received $45000 as a trade in so I have a gain of approximately $21000.  The new boat cost $73,000.  My question is should I enter the entire cost of $73000 for the new boat?  I am thinking I should since I am claiming the gain from the old boat. I am considering them two separate transactions since I can't defer the gain of a like-kind exchange.  Please advise.

[M-MTax]

You're right....it's the entire cost of the new boat.

[GeorgeM777 · Accepted solution]

Yes, your perspective on how to handle these transactions is correct.  Treat them as two separate transactions.  Realize the gain on the old boat and enter that gain as a capital gain on your return.  If you've held the old boat for longer than 12 months, the maximum tax on long-term capital gains is 20 percent, but it could be 15% depending on your taxable income.  (Taxpayers in the 10-percent and 15-percent tax brackets pay zero percent.).  Additionally, enter your cost for the new boat where appropriate, and if that new boat will be used for business, then depreciate it as you did for the old boat.  

What you probably heard regarding like-kind exchanges was that like-kind exchange tax treatment is now generally limited to exchanges of real property.  Limiting like-kind exchanges to real property was the result of The Tax Cuts and Jobs Act, passed in December 2017.  Thus, effective January 1, 2018, exchanges of personal or intangible property such as machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain or loss as like-kind exchanges.

[M-MTax]

Yeah but if the boat was used for business, then there is going to be recapture of depreciation deductions. 

[GeorgeM777]

Yes, you correct.  The depreciation recapture was overlooked.  Because your total depreciation exceeds the gain realized, all of the depreciation is recaptured (up until the amount of the gain) and taxed at a maximum rate of 25%.  

[Liz55]

Thank you all for your very helpful responses.  A point was brought up about the depreciation recapture.  Are you saying that the gain should be $40,000 (the amount of the depreciation)?  Please advise.

Regards!

[RobertB4444]

@Liz55 You actually got it already.  In your example the depreciation recapture is $21,000 - a recapture of the depreciation up to the amount of the gain.  You had already figured it, you just didn't call it that.

Continue with the transaction entry as you were.  Just make sure to enter the prior depreciation for the boat that you traded in.