A like kind exchange (IRC §1031 exchange) is a transaction in which a taxpayer disposes of an asset and replaces it with another asset of similar properties (i.e. a truck traded in for another truck). Pre 2018 tax rules allowed for deferment of gain, thus no tax liability was recognized on the disposal of like kind property. Under the Tax Cuts and Jobs Act, deferment of gain is no longer eligible for personal property. Real property continues to be eligible for IRC §1031 treatment as the rules have not been changed.

Let’s assume the following:

• You buy a truck January 1, 2018 for $40,000
• You fully depreciate the truck on your 2018 tax return, taking a $40,000 depreciation expense
• On January 1, 2019, you trade the old truck in for a new truck, costing $50,000
• The trade in value you received for the new truck is $36,000

In this scenario and under the new rules, the taxpayer will recognize a gain of $36,000 on their 2019 tax return ($36,000 trade in value -($40,000 cost – $40,000 depreciation)).

The $36,000 gain will be offset by fully depreciating $50,000 for the new truck in 2019. Both the gain of $36,000 and the depreciation expense of $50,000 are will be considered ordinary income and deductions (the recapture of depreciation is treated as ordinary income per IRC §1245).

Where a like kind exchange for personal property would benefit a taxpayer is if the property appreciated in value. Thus, in our example above, imagine the truck’s trade in value was $45,000. In this scenario, the taxpayer would recognize a $40,000 gain on the depreciation recapture (ordinary), a $5,000 CAPITAL gain subject to more favorable tax rates, and still receive a $50,000 depreciation deduction (ordinary) on their 2019 tax return.