Depreciation of MACRS Property That Is Acquired in a Like-Kind Exchange or as a Result of an Involuntary Conversion, 9245-9262 [07-922]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 40 (Thursday, March 1, 2007)]
[Rules and Regulations]
[Pages 9245-9262]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-922]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9314]
RIN 1545-BF37


Depreciation of MACRS Property That Is Acquired in a Like-Kind 
Exchange or as a Result of an Involuntary Conversion

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
depreciation of property subject to the accelerated cost recovery 
system under section 168 of the Internal Revenue Code (MACRS property). 
Specifically, these final regulations provide guidance on how to 
depreciate MACRS property acquired in a like-kind exchange under 
section 1031 or as a result of an involuntary conversion under section 
1033 when both the acquired and relinquished property are subject to 
MACRS in the hands of the acquiring taxpayer. These final regulations 
will affect taxpayers involved in a like-kind exchange under section 
1031 or an involuntary conversion under section 1033. The corresponding 
temporary regulations are removed.

DATES: Effective Dates: These regulations are effective on February 26, 
2007.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.168(a)-1(b), 1.168(b)-1(b), 1.168(d)-1(d)(3), 1.168(i)-1(l), 
1.168(i)-6(k), and 1.168(k)-1(g)(3)(ii).

FOR FURTHER INFORMATION CONTACT: Patrick S. Kirwan, (202) 622-3110 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under section 
168 of the Internal Revenue Code (Code). Section 168 provides the 
depreciation deduction for tangible property generally placed in 
service after December 31, 1986.
    On March 1, 2004, the IRS and the Treasury Department published in 
the Federal Register (69 FR 9529) temporary regulations (TD 9115) 
relating to the depreciation allowable for tangible property of a 
character subject to the allowance for depreciation provided in section 
167(a) that is generally placed in service after

[[Page 9246]]

December 31, 1986, and is subject to section 168 (MACRS property) that 
is acquired in a like-kind exchange or as a result of involuntary 
conversion. On the same date the IRS published a notice of proposed 
rulemaking related to this topic in the Federal Register (69 FR 9560). 
No public hearing on the regulations was requested or held. Several 
written comments to the notice of proposed rulemaking were received. 
After consideration of all the comments received, the proposed 
regulations are adopted as amended by this Treasury decision, and the 
corresponding temporary regulations are removed. The revisions to the 
proposed regulations are discussed in this preamble. Unless otherwise 
specifically stated, references to the temporary regulations are to TD 
9115.

General Overview

    Section 167 allows as a depreciation deduction a reasonable 
allowance for the exhaustion, wear, and tear of property used in a 
trade or business or held for the production of income. The 
depreciation allowable for depreciable tangible property placed in 
service after 1986 generally is determined under section 168. Section 
1001 generally provides for the recognition of gain or loss on the sale 
or exchange of property. Under section 1031(a)(1), no gain or loss is 
recognized on an exchange of property held for productive use in a 
trade or business or for investment if the property is exchanged solely 
for property of like kind that is to be held either for productive use 
in a trade or business or for investment. Section 1031(b) provides that 
if an exchange would be within the provision of section 1031(a) were it 
not for the fact that the property received in the exchange consists 
not only of property permitted to be received in such an exchange, but 
also of other property or money, then the gain, if any, to the 
recipient shall be recognized, but in an amount not in excess of the 
sum of such money and the fair market value of such other property. 
Under section 1031(c), no loss from a transaction that also involves 
other property or money is recognized. Under section 1031(d), the basis 
of property acquired in an exchange described in section 1031 is the 
same as that of the property exchanged, decreased by the amount of any 
money received by the taxpayer and increased by the amount of gain (or 
decreased by the amount of loss) that was recognized on such exchange.
    Section 1033(a)(1) provides that if property (as a result of its 
destruction in whole or in part, theft, seizure, or requisition or 
condemnation or threat or imminence thereof) is compulsorily or 
involuntarily converted into property similar or related in service or 
use to the property so converted, no gain is recognized. Under section 
1033(b)(1), the basis of property acquired by the taxpayer in such a 
transaction is the basis of the converted property. Under section 
1033(a)(2)(A), if property is compulsorily or involuntarily converted 
into money or into property not similar or related in service or use to 
the converted property, and, within the time frame described in section 
1033(a)(2)(B), the taxpayer purchases other property that is related in 
service or use to the converted property or purchases stock in the 
acquisition of control of a corporation owning such property, then the 
taxpayer may elect to recognize gain only to the extent that the amount 
realized upon such conversion exceeds the cost of such other property 
or stock. Under section 1033(b)(2), if such an election is made, the 
basis of the replacement property acquired by the taxpayer generally is 
the cost of that property decreased by any gain not recognized by 
reason of section 1033(a)(2).

Summary of Comments and Explanation of Provisions

Scope

    In general, the final regulations adopt the rules outlined in the 
proposed and temporary regulations with the addition of some clarifying 
language and examples provided in response to comments. The temporary 
regulations provided guidance as to how to determine the annual 
depreciation allowance under section 168 for replacement property 
acquired in a like-kind exchange or involuntary conversion. However, 
the temporary regulations did not apply to a like-kind exchange or 
involuntary conversion if the allowance for depreciation of either the 
relinquished or replacement property is computed under a depreciation 
system other than section 168 (MACRS), or for which a taxpayer made a 
valid election under section 168(f)(1) to exclude it from the 
application of MACRS. A commentator requested that the final 
regulations apply to all property acquired in a like-kind exchange or 
involuntary conversion. However, it is anticipated that the vast 
majority of like-kind exchanges and involuntary conversions occurring 
after the effective date of the final regulations will involve the 
exchange of MACRS property. In addition, there are differences between 
MACRS and other depreciation systems which would require the creation 
of additional rules which would only apply in a limited number of 
circumstances. Furthermore, certain types of property are statutorily 
excluded from being treated as MACRS property. Therefore, the final 
regulations do not adopt the commentator's suggestion. However, the 
final regulations allow a taxpayer to elect to treat the sum of the 
exchanged basis and excess basis of the replacement property as MACRS 
property that is placed in service at the time of replacement if the 
tangible depreciable property acquired by a taxpayer in a like-kind 
exchange or involuntary conversion replaces tangible depreciable 
property for which the taxpayer made a valid election under section 
168(f)(1) to exclude it from the application of MACRS. For example, a 
taxpayer that exchanges a machine depreciated under the unit of 
production method for a used machine may depreciate under MACRS the sum 
of the exchanged basis and excess basis of the used machine 
(replacement property) as a machine placed in service at the time of 
replacement.

Optional Depreciation Tables

    For taxpayers who wish to use the optional depreciation tables to 
determine the depreciation allowances for the replacement MACRS 
property instead of the formulas (for example, see section 6 of Rev. 
Proc. 87-57 (1987-2 CB 687, 692)), the final regulations provide 
guidance on choosing the applicable optional table as well as how to 
modify the calculation for computing the depreciation allowances for 
the replacement MACRS property. A commentator noted that under the 
temporary regulations depreciation computed using the optional tables 
could be different than the depreciation computed using the formulas 
and suggested adopting a different transaction coefficient. The IRS and 
Treasury recognize that use of the optional depreciation tables may 
result in a different computation of depreciation. Nonetheless, the 
optional depreciation tables are intended to provide an alternative 
method of calculating depreciation for taxpayers. Furthermore, the 
transaction coefficient formula provided in the temporary regulations 
is consistent with transaction coefficient formulas provided in other 
depreciation guidance. Therefore, the final regulations retain the 
rules provided in the temporary regulations.

Depreciation Convention Provisions

    Several comments were received about the application of the

[[Page 9247]]

depreciation convention provisions under the temporary regulations. In 
response to these comments, several changes were made in the final 
regulations. Section 1.168(i)-6(c)(5)(ii)(A) was added in order to 
provide an explanation of the applicable convention separate from the 
explanation of the rule for determining the remaining recovery period 
for the replacement MACRS property. Section 1.168(i)-6(c)(4)(v) 
specifically addresses the convention that applies to the exchanged 
basis when the year of replacement is after the year of disposition and 
the relinquished MACRS property was placed in service in the year of 
disposition. Section 1.168(i)-6(c)(5)(i)(B) of the final regulations 
contains a new rule that provides that if, using the convention that 
applies to the relinquished MACRS property, the remaining recovery 
period of the relinquished MACRS property at the beginning of the year 
of disposition is less than the number of months between the first of 
that year and the time of disposition, the entire basis in the 
relinquished MACRS property is deductible in the year of disposition 
and the exchanged basis is zero. In light of this new rule, Example 4 
of Sec.  1.168(i)-6T(c)(6) of the temporary regulations has been 
replaced by Example 5 of Sec.  1.168(i)-6(c)(6).

Deferred Exchanges

    The temporary regulations did not permit a taxpayer to take 
depreciation on relinquished MACRS property during the period between 
the disposition of the relinquished MACRS property and the acquisition 
of the replacement MACRS property. A comment was received which noted 
that under the half-year convention if relinquished MACRS property is 
disposed of in year 1 and the replacement MACRS property is not 
acquired until year 2, the taxpayer would only be entitled to deduct a 
half-year of depreciation in each year. The IRS and Treasury Department 
recognize that this result could occur under the convention rules. 
However, similar results occur when property is disposed of and 
replaced in a transaction to which section 1031 or section 1033 do not 
apply. In addition, the IRS and Treasury Department believe that a 
taxpayer cannot depreciate property the taxpayer does not own. 
Therefore, the final regulations retain the rule provided in the 
temporary regulations with respect to this issue. The final regulations 
reserve on providing specific guidance as to whether an intermediary 
(such as an exchange accommodation titleholder) is entitled to 
depreciation.

Acquisition Prior to Disposition for an Involuntary Conversion

    The temporary regulations allowed taxpayers to begin depreciating 
replacement property upon acquisition even if the acquisition occurs 
prior the disposition of the relinquished property if the replacement 
property is acquired to meet the requirements of section 1033(a)(2)(B) 
(acquisition under threat of condemnation). However, the temporary 
regulations also required taxpayers to include in taxable income any 
excess depreciation allowable on the unadjusted depreciable basis of 
the replacement MACRS property over the depreciation allowable on the 
excess basis of the replacement MACRS property from the date the 
replacement MACRS property was placed in service by the taxpayer to the 
time of disposition of the relinquished MACRS property. A comment was 
received suggesting that taxpayers be permitted to reduce the exchanged 
basis of the replacement property by the excess depreciation rather 
than requiring a taxpayer to recognize the excess depreciation as 
taxable income. This suggestion was not adopted in the final 
regulations because it would have the effect of inappropriately 
accelerating depreciation deductions for the replacement property.

Exchanges of Multiple Properties

    The determination of the basis of property acquired in a like-kind 
exchange involving multiple properties is described in Sec.  1.1031(j)-
1 and the determination of the basis of multiple properties acquired as 
a result of an involuntary conversion is described in Sec.  1.1033(b)-
1. Commentators requested examples to show how the temporary 
regulations apply to the depreciation treatment of a like-kind exchange 
or an involuntary conversion involving multiple properties. Other 
commentators suggested that taxpayers be permitted to use any 
reasonable, consistent method of allocating basis among the properties. 
The IRS and Treasury Department believe that these comments concern the 
allocation of basis principles under sections 1031 and 1033, rather 
than the depreciation rules under section 168. Once basis in property 
is determined or allocated under section 1031 or section 1033, these 
final regulations would then apply for determining the depreciation 
allowable with respect to such basis. The IRS and Treasury Department 
believe that issues related to allocation of basis among multiple 
properties involved in like-kind exchanges or involuntary conversions 
for purposes of depreciation are beyond the scope of the final 
regulations. Therefore the final regulations do not address these 
issues. However, the IRS and Treasury Department intend to invite 
interested parties to submit written comments regarding whether 
additional published guidance is needed in this area, and to invite 
written comments that specifically propose or address possible 
resolutions to these issues.

Transactions Involving Nondepreciable Property

    A commentator requested guidance as to how depreciation is 
calculated if the relinquished property was only partially used for 
business purposes. In response to this comment, the final regulations 
provide an example to show how depreciation is calculated on 
replacement property received in exchange for property that was used 
only partially for business purposes (see Example 2 in Sec.  1.168(i)-
6(d)(3)(iii)).

General Asset Accounts

    Under the temporary regulations, general asset account treatment 
terminates for the relinquished MACRS property as of the first day of 
the year of disposition. Because this rule would require taxpayers to 
track each property in a general asset account, the IRS and Treasury 
Department requested comments on alternative methods to account for a 
like-kind exchange or involuntary conversion involving MACRS property 
contained in a general asset account when the replacement MACRS 
property has a longer recovery period or less accelerated depreciation 
method than the relinquished MACRS property or when the basis of the 
general asset account would change as a result of the like-kind 
exchange or involuntary conversion. No comments were received on this 
rule and no alternatives were suggested. Therefore, the regulations are 
adopted as proposed.

Effective Date

    These final regulations generally apply to a like-kind exchange or 
an involuntary conversion of MACRS property for which the time of 
disposition and the time of replacement both occur after February 27, 
2004. For a like-kind exchange or an involuntary conversion of MACRS 
property for which the time of disposition, the time of replacement, or 
both occur on or before February 27, 2004, a taxpayer may apply these 
final regulations or rely on prior guidance issued by the IRS.

[[Page 9248]]

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations and, because 
these regulations do not impose a collection of information requirement 
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking preceding these final regulations was submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Patrick S. Kirwan, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Sections 1.168(a)-1 and 1.168(b)-1 are added to read as 
follows:


Sec.  1.168(a)-1  Modified accelerated cost recovery system.

    (a) Section 168 determines the depreciation allowance for tangible 
property that is of a character subject to the allowance for 
depreciation provided in section 167(a) and that is placed in service 
after December 31, 1986 (or after July 31, 1986, if the taxpayer made 
an election under section 203(a)(1)(B) of the Tax Reform Act of 1986; 
100 Stat. 2143). Except for property excluded from the application of 
section 168 as a result of section 168(f) or as a result of a 
transitional rule, the provisions of section 168 are mandatory for all 
eligible property. The allowance for depreciation under section 168 
constitutes the amount of depreciation allowable under section 167(a). 
The determination of whether tangible property is property of a 
character subject to the allowance for depreciation is made under 
section 167 and the regulations under section 167.
    (b) This section is applicable on and after February 27, 2004.


Sec.  1.168(b)-1  Definitions.

    (a) Definitions. For purposes of section 168 and the regulations 
under section 168, the following definitions apply:
    (1) Depreciable property is property that is of a character subject 
to the allowance for depreciation as determined under section 167 and 
the regulations under section 167.
    (2) MACRS property is tangible, depreciable property that is placed 
in service after December 31, 1986 (or after July 31, 1986, if the 
taxpayer made an election under section 203(a)(1)(B) of the Tax Reform 
Act of 1986; 100 Stat. 2143) and subject to section 168, except for 
property excluded from the application of section 168 as a result of 
section 168(f) or as a result of a transitional rule.
    (3) Unadjusted depreciable basis is the basis of property for 
purposes of section 1011 without regard to any adjustments described in 
section 1016(a)(2) and (3). This basis reflects the reduction in basis 
for the percentage of the taxpayer's use of property for the taxable 
year other than in the taxpayer's trade or business (or for the 
production of income), for any portion of the basis the taxpayer 
properly elects to treat as an expense under section 179, section 179C, 
or any similar provision, and for any adjustments to basis provided by 
other provisions of the Internal Revenue Code and the regulations under 
the Code (other than section 1016(a)(2) and (3)) (for example, a 
reduction in basis by the amount of the disabled access credit pursuant 
to section 44(d)(7)). For property subject to a lease, see section 
167(c)(2).
    (4) Adjusted depreciable basis is the unadjusted depreciable basis 
of the property, as defined in Sec.  1.168(b)-1(a)(3), less the 
adjustments described in section 1016(a)(2) and (3).
    (b) Effective date. This section is applicable on or after February 
27, 2004.


Sec. Sec.  1.168(a)-1T and 1.168(b)-1T  [Removed]

0
Par. 3. Sections 1.168(a)-1T and 1.168(b)-1T are removed.
0
Par. 4. Section 1.168(d)-1 is amended by revising the section heading 
and paragraphs (b)(3) and (d)(3) to read as follows:


Sec.  1.168(d)-1  Applicable conventions--half-year and mid-quarter 
conventions.

* * * * *
    (b) * * *
    (3) Property placed in service and disposed of in the same taxable 
year. (i) Under section 168(d)(3)(B)(ii), the depreciable basis of 
property placed in service and disposed of in the same taxable year is 
not taken into account in determining whether the 40-percent test is 
satisfied. However, the depreciable basis of property placed in 
service, disposed of, subsequently reacquired, and again placed in 
service, by the taxpayer in the same taxable year must be taken into 
account in applying the 40-percent test, but the basis of the property 
is only taken into account on the later of the dates that the property 
is placed in service by the taxpayer during the taxable year. Further, 
see Sec. Sec.  1.168(i)-6(c)(4)(v)(B) and 1.168(i)-6(f) for rules 
relating to property placed in service and exchanged or involuntarily 
converted during the same taxable year.
    (ii) The applicable convention, as determined under this section, 
applies to all depreciable property (except nonresidential real 
property, residential rental property, and any railroad grading or 
tunnel bore) placed in service by the taxpayer during the taxable year, 
excluding property placed in service and disposed of in the same 
taxable year. However, see Sec. Sec.  1.168(i)-6(c)(4)(v)(A) and 
1.168(i)-6(f) for rules relating to MACRS property that has a basis 
determined under section 1031(d) or section 1033(b). No depreciation 
deduction is allowed for property placed in service and disposed of 
during the same taxable year. However, see Sec.  1.168(k)-1(f)(1) for 
rules relating to qualified property or 50-percent bonus depreciation 
property, and Sec.  1.1400L(b)-1(f)(1) for rules relating to qualified 
New York Liberty Zone property, that is placed in service by the 
taxpayer in the same taxable year in which either a partnership is 
terminated as a result of a technical termination under section 
708(b)(1)(B) or the property is transferred in a transaction described 
in section 168(i)(7).
* * * * *
    (d) * * *
    (3) Like-kind exchanges and involuntary conversions. The last 
sentence in paragraph (b)(3)(i) and the second sentence in paragraph 
(b)(3)(ii) of this section apply to exchanges to which section 1031 
applies, and involuntary conversions to which section 1033 applies, of 
MACRS property for which the time of disposition and the time of 
replacement both occur after February 27, 2004.

[[Page 9249]]

Sec.  1.168(d)-1T  [Removed]

0
Par. 5. Section 1.168(d)-1T is removed.

0
Par. 6. Section 1.168(i)-0 is amended as follows:
0
1. The entries for Sec.  1.168(i)-1(d)(2), (e)(3)(i), (e)(3)(v), 
(e)(3)(vi), (f), (f)(1), (f)(2), (f)(2)(i), (i), (j), and (l) are 
revised.
0
2. The entries for Sec.  1.168(i)-1(l)(1), (l)(2), and (l)(3) are 
added.
    The revisions and additions read as follows:


Sec.  1.168(i)-0  Table of contents for the general asset account 
rules.

* * * * *


Sec.  1.168(i)-1  General asset accounts.

* * * * *
    (d) * * *
    (2) Special rule for passenger automobiles.
* * * * *
    (e) * * *
    (3) * * *
    (i) In general.
* * * * *
    (v) Transactions subject to section 1031 or 1033.
    (vi) Anti-abuse rule.
* * * * *
    (f) Assets generating foreign source income.
    (1) In general.
    (2) Source of ordinary income, gain, or loss.
    (i) Source determined by allocation and apportionment of 
depreciation allowed.
* * * * *
    (i) Identification of disposed or converted asset.
    (j) Effect of adjustments on prior dispositions.
* * * * *
    (l) Effective date.
    (1) In general.
    (2) Exceptions.
    (3) Like-kind exchanges and involuntary conversions.

Sec.  1.168(i)-0T  [Removed]

0
Par. 7. Section 1.168(i)-0T is removed.

0
Par. 8. Section 1.168(i)-1 is amended as follows:
0
1. Paragraphs (d)(2), (e)(3)(i), (e)(3)(iii)(B)(4), (e)(3)(v), 
(e)(3)(vi), (f)(1), (f)(2)(i), (i), (j), (l)(1), and (l)(3) are 
revised.
0
2. The first sentence in paragraph (l)(2)(ii)(B) is amended by removing 
the language ``as modified by Rev. Proc. 2004-11 (2004-3 I.R.B. 311)''.
    The revisions read as follows:


Sec.  1.168(i)-1  General asset accounts.

* * * * *
    (d) * * *
    (2) Special rule for passenger automobiles. For purposes of 
applying section 280F(a), the depreciation allowance for a general 
asset account established for passenger automobiles is limited for each 
taxable year to the amount prescribed in section 280F(a) multiplied by 
the excess of the number of automobiles originally included in the 
account over the number of automobiles disposed of during the taxable 
year or in any prior taxable year in a transaction described in 
paragraph (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), (e)(3)(iv) (transactions subject to section 168(i)(7)), 
(e)(3)(v) (transactions subject to section 1031 or 1033), (e)(3)(vi) 
(anti-abuse rule), (g) (assets subject to recapture), or (h)(1) 
(conversion to personal use) of this section.
    (e) * * *
    (3) * * *
    (i) In general. This paragraph (e)(3) provides the rules for 
terminating general asset account treatment upon certain dispositions. 
While the rules under paragraphs (e)(3)(ii) and (iii) of this section 
are optional rules, the rules under paragraphs (e)(3)(iv), (v), and 
(vi) of this section are mandatory rules. A taxpayer applies paragraph 
(e)(3)(ii) or (iii) of this section by reporting the gain, loss, or 
other deduction on the taxpayer's timely filed Federal income tax 
return (including extensions) for the taxable year in which the 
disposition occurs. For purposes of applying paragraph (e)(3)(iii) 
through (vi) of this section, see paragraph (i) of this section for 
identifying the unadjusted depreciable basis of a disposed asset.
* * * * *
    (iii) * * *
    (B) * * *
    (4) A transaction, other than a transaction described in paragraphs 
(e)(3)(iv) (pertaining to transactions subject to section 168(i)(7)) 
and (e)(3)(v) (pertaining to transactions subject to section 1031 or 
1033) of this section, to which a nonrecognition section of the Code 
applies (determined without regard to this section).
* * * * *
    (v) Transactions subject to section 1031 or section 1033--(A) Like-
kind exchange or involuntary conversion of all assets remaining in a 
general asset account. If all the assets, or the last asset, in a 
general asset account are transferred by a taxpayer in a like-kind 
exchange (as defined under Sec.  1.168-6(b)(11)) or in an involuntary 
conversion (as defined under Sec.  1.168-6(b)(12)), the taxpayer must 
apply this paragraph (e)(3)(v)(A) (instead of applying paragraph 
(e)(2), (e)(3)(ii), or (e)(3)(iii) of this section). Under this 
paragraph (e)(3)(v)(A), the general asset account terminates as of the 
first day of the year of disposition (as defined in Sec.  1.168(i)-
6(b)(5)) and--
    (1) The amount of gain or loss for the general asset account is 
determined under section 1001(a) by taking into account the adjusted 
depreciable basis of the general asset account at the time of 
disposition (as defined in Sec.  1.168(i)-6(b)(3)). The depreciation 
allowance for the general asset account in the year of disposition is 
determined in the same manner as the depreciation allowance for the 
relinquished MACRS property (as defined in Sec.  1.168(i)-6(b)(2)) in 
the year of disposition is determined under Sec.  1.168(i)-6. The 
recognition and character of gain or loss are determined in accordance 
with paragraph (e)(3)(ii)(A) of this section (notwithstanding that 
paragraph (e)(3)(ii) of this section is an optional rule); and
    (2) The adjusted depreciable basis of the general asset account at 
the time of disposition is treated as the adjusted depreciable basis of 
the relinquished MACRS property.
    (B) Like-kind exchange or involuntary conversion of less than all 
assets remaining in a general asset account. If an asset in a general 
asset account is transferred by a taxpayer in a like-kind exchange or 
in an involuntary conversion and if paragraph (e)(3)(v)(A) of this 
section does not apply to this asset, the taxpayer must apply this 
paragraph (e)(3)(v)(B) (instead of applying paragraph (e)(2), 
(e)(3)(ii), or (e)(3)(iii) of this section). Under this paragraph 
(e)(3)(v)(B), general asset account treatment for the asset terminates 
as of the first day of the year of disposition (as defined in Sec.  
1.168(i)-6(b)(5)), and--
    (1) The amount of gain or loss for the asset is determined by 
taking into account the asset's adjusted basis at the time of 
disposition (as defined in Sec.  1.168(i)-6(b)(3)). The adjusted basis 
of the asset at the time of disposition equals the unadjusted 
depreciable basis of the asset less the depreciation allowed or 
allowable for the asset, computed by using the depreciation method, 
recovery period, and convention applicable to the general asset account 
in which the asset was included. The depreciation allowance for the 
asset in the year of disposition is determined in the same manner as 
the depreciation allowance for the relinquished MACRS property (as 
defined in Sec.  1.168(i)-6(b)(2)) in the year of disposition is 
determined under Sec.  1.168(i)-6. The recognition and character of the 
gain or loss are determined in accordance with paragraph (e)(3)(iii)(A) 
of this section (notwithstanding that paragraph

[[Page 9250]]

(e)(3)(iii) of this section is an optional rule); and
    (2) As of the first day of the year of disposition, the taxpayer 
must remove the relinquished asset from the general asset account and 
make the adjustments to the general asset account described in 
paragraph (e)(3)(iii)(C)(2) through (4) of this section.
    (vi) Anti-abuse rule--(A) In general. If an asset in a general 
asset account is disposed of by a taxpayer in a transaction described 
in paragraph (e)(3)(vi)(B) of this section, general asset account 
treatment for the asset terminates as of the first day of the taxable 
year in which the disposition occurs. Consequently, the taxpayer must 
determine the amount of gain, loss, or other deduction attributable to 
the disposition in the manner described in paragraph (e)(3)(iii)(A) of 
this section (notwithstanding that paragraph (e)(3)(iii)(A) of this 
section is an optional rule) and must make the adjustments to the 
general asset account described in paragraph (e)(3)(iii)(C)(1) through 
(4) of this section.
    (B) Abusive transactions. A transaction is described in this 
paragraph (e)(3)(vi)(B) if the transaction is not described in 
paragraph (e)(3)(iv) or (e)(3)(v) of this section and the transaction 
is entered into, or made, with a principal purpose of achieving a tax 
benefit or result that would not be available absent an election under 
this section. Examples of these types of transactions include--
    (1) A transaction entered into with a principal purpose of shifting 
income or deductions among taxpayers in a manner that would not be 
possible absent an election under this section in order to take 
advantage of differing effective tax rates among the taxpayers; or
    (2) An election made under this section with a principal purpose of 
disposing of an asset from a general asset account in order to utilize 
an expiring net operating loss or credit. The fact that a taxpayer with 
a net operating loss carryover or a credit carryover transfers an asset 
to a related person or transfers an asset pursuant to an arrangement 
where the asset continues to be used (or is available for use) by the 
taxpayer pursuant to a lease (or otherwise) indicates, absent strong 
evidence to the contrary, that the transaction is described in this 
paragraph (e)(3)(vi)(B).
    (f) * * *
    (1) In general. This paragraph (f) provides the rules for 
determining the source of any income, gain, or loss recognized, and the 
appropriate section 904(d) separate limitation category or categories 
for any foreign source income, gain, or loss recognized, on a 
disposition (within the meaning of paragraph (e)(1) of this section) of 
an asset in a general asset account that consists of assets generating 
both United States and foreign source income. These rules apply only to 
a disposition to which paragraph (e)(2) (general disposition rules), 
(e)(3)(ii) (disposition of all assets remaining in a general asset 
account), (e)(3)(iii) (disposition of an asset in a qualifying 
disposition), (e)(3)(v) (transactions subject to section 1031 or 1033), 
or (e)(3)(vi) (anti-abuse rule) of this section applies.
    (2) * * *
    (i) Source determined by allocation and apportionment of 
depreciation allowed. The amount of any ordinary income, gain, or loss 
that is recognized on the disposition of an asset in a general asset 
account must be apportioned between United States and foreign sources 
based on the allocation and apportionment of the--
    (A) Depreciation allowed for the general asset account as of the 
end of the taxable year in which the disposition occurs if paragraph 
(e)(2) of this section applies to the disposition;
    (B) Depreciation allowed for the general asset account as of the 
time of disposition if the taxpayer applies paragraph (e)(3)(ii) of 
this section to the disposition of all assets, or the last asset, in 
the general asset account, or if all the assets, or the last asset, in 
the general asset account are disposed of in a transaction described in 
paragraph (e)(3)(v)(A) of this section; or
    (C) Depreciation allowed for the disposed asset for only the 
taxable year in which the disposition occurs if the taxpayer applies 
paragraph (e)(3)(iii) of this section to the disposition of the asset 
in a qualifying disposition, if the asset is disposed of in a 
transaction described in paragraph (e)(3)(v)(B) of this section (like-
kind exchange or involuntary conversion), or if the asset is disposed 
in a transaction described in paragraph (e)(3)(vi) of this section 
(anti-abuse rule).
* * * * *
    (i) Identification of disposed or converted asset. A taxpayer may 
use any reasonable method that is consistently applied to the 
taxpayer's general asset accounts for purposes of determining the 
unadjusted depreciable basis of a disposed or converted asset in a 
transaction described in paragraph (e)(3)(iii) (disposition of an asset 
in a qualifying disposition), (e)(3)(iv) (transactions subject to 
section 168(i)(7)), (e)(3)(v) (transactions subject to section 1031 or 
1033), (e)(3)(vi) (anti-abuse rule), (g) (assets subject to recapture), 
or (h)(1) (conversion to personal use) of this section.
    (j) Effect of adjustments on prior dispositions. The adjustments to 
a general asset account under paragraph (e)(3)(iii), (e)(3)(iv), 
(e)(3)(v), (e)(3)(vi), (g), or (h)(1) of this section have no effect on 
the recognition and character of prior dispositions subject to 
paragraph (e)(2) of this section.
* * * * *
    (l) * * *
    (1) In general. Except as provided in paragraphs (l)(2) and (l)(3) 
of this section, this section applies to depreciable assets placed in 
service in taxable years ending on or after October 11, 1994. For 
depreciable assets placed in service after December 31, 1986, in 
taxable years ending before October 11, 1994, the Internal Revenue 
Service will allow any reasonable method that is consistently applied 
to the taxpayer's general asset accounts.
* * * * *
    (3) Like-kind exchanges and involuntary conversions. This section 
applies for an asset transferred by a taxpayer in a like-kind exchange 
(as defined under Sec.  1.168-6(b)(11)) or in an involuntary conversion 
(as defined under Sec.  1.168-6(b)(12)) for which the time of 
disposition (as defined in Sec.  1.168(i)-6(b)(3)) and the time of 
replacement (as defined in Sec.  1.168(i)-6(b)(4)) both occur after 
February 27, 2004. For an asset transferred by a taxpayer in a like-
kind exchange or in an involuntary conversion for which the time of 
disposition, the time of replacement, or both occur on or before 
February 27, 2004, see Sec.  1.168(i)-1 in effect prior to February 27, 
2004 (Sec.  1.168(i)-1 as contained in 26 CFR part 1 edition revised as 
of April 1, 2003).


Sec.  1.168(i)-1T  [Removed]

0
Par. 9. Section 1.168(i)-1T is removed.

0
Par. 10. Section 1.168(i)-5 is added to read as follows:


Sec.  1.168(i)-5  Table of contents.

    This section lists the major paragraphs contained in Sec.  
1.168(i)-6.


Sec.  1.168(i)-6  Like-kind exchanges and involuntary conversions.

    (a) Scope.
    (b) Definitions.
    (1) Replacement MACRS property.
    (2) Relinquished MACRS property.
    (3) Time of disposition.
    (4) Time of replacement.
    (5) Year of disposition.
    (6) Year of replacement.
    (7) Exchanged basis.
    (8) Excess basis.

[[Page 9251]]

    (9) Depreciable exchanged basis.
    (10) Depreciable excess basis.
    (11) Like-kind exchange.
    (12) Involuntary conversion.
    (c) Determination of depreciation allowance.
    (1) Computation of the depreciation allowance for depreciable 
exchanged basis beginning in the year of replacement.
    (i) In general.
    (ii) Applicable recovery period, depreciation method, and 
convention.
    (2) Effect of depreciation treatment of the replacement MACRS 
property by previous owners of the acquired property.
    (3) Recovery period and/or depreciation method of the properties 
are the same, or both are not the same.
    (i) In general.
    (ii) Both the recovery period and the depreciation method are 
the same.
    (iii) Either the recovery period or the depreciation method is 
the same, or both are not the same.
    (4) Recovery period or depreciation method of the properties is 
not the same.
    (i) Longer recovery period.
    (ii) Shorter recovery period.
    (iii) Less accelerated depreciation method.
    (iv) More accelerated depreciation method.
    (v) Convention.
    (A) Either the relinquished MACRS property or the replacement 
MACRS property is mid-month property.
    (B) Neither the relinquished MACRS property nor the replacement 
MACRS property is mid-month property.
    (5) Year of disposition and year of replacement.
    (i) Relinquished MACRS property.
    (A) General rule.
    (B) Special rule.
    (ii) Replacement MACRS property.
    (A) Remaining recovery period of the replacement MACRS property.
    (B) Year of replacement is 12 months.
    (iii) Year of disposition or year of replacement is less than 12 
months.
    (iv) Deferred transactions.
    (A) In general.
    (B) Allowable depreciation for a qualified intermediary.
    (v) Remaining recovery period.
    (6) Examples.
    (d) Special rules for determining depreciation allowances.
    (1) Excess basis.
    (i) In general.
    (ii) Example.
    (2) Depreciable and nondepreciable property.
    (3) Depreciation limitations for automobiles.
    (i) In general.
    (ii) Order in which limitations on depreciation under section 
280F(a) are applied.
    (iii) Examples.
    (4) Involuntary conversion for which the replacement MACRS 
property is acquired and placed in service before disposition of 
relinquished MACRS property.
    (e) Use of optional depreciation tables.
    (1) Taxpayer not bound by prior use of table.
    (2) Determination of the depreciation deduction.
    (i) Relinquished MACRS property.
    (ii) Replacement MACRS property.
    (A) Determination of the appropriate optional depreciation 
table.
    (B) Calculating the depreciation deduction for the replacement 
MACRS property.
    (iii) Unrecovered basis.
    (3) Excess basis.
    (4) Examples.
    (f) Mid-quarter convention.
    (1) Exchanged basis.
    (2) Excess basis.
    (3) Depreciable property acquired for nondepreciable property.
    (g) Section 179 election.
    (h) Additional first year depreciation deduction.
    (i) Elections.
    (1) Election not to apply this section.
    (2) Election to treat certain replacement property as MACRS 
property.
    (j) Time and manner of making election under paragraph (i)(1) of 
this section.
    (1) In general.
    (2) Time for making election.
    (3) Manner of making election.
    (4) Revocation.
    (k) Effective date.
    (1) In general.
    (2) Application to pre-effective date like-kind exchanges and 
involuntary conversions.
    (3) Like-kind exchanges and involuntary conversions where the 
taxpayer made the election under section 168(f)(1) for the 
relinquished property.


Sec.  1.168(i)-5T  [Removed]

0
Par. 11. Section 1.168(i)-5T is removed.
0
Par. 12. Section 1.168(i)-6 is added to read as follows:


Sec.  1.168(i)-6  Like-kind exchanges and involuntary conversions.

    (a) Scope. This section provides the rules for determining the 
depreciation allowance for MACRS property acquired in a like-kind 
exchange or an involuntary conversion, including a like-kind exchange 
or an involuntary conversion of MACRS property that is exchanged or 
replaced with other MACRS property in a transaction between members of 
the same affiliated group. The allowance for depreciation under this 
section constitutes the amount of depreciation allowable under section 
167(a) for the year of replacement and any subsequent taxable year for 
the replacement MACRS property and for the year of disposition of the 
relinquished MACRS property. The provisions of this section apply only 
to MACRS property to which Sec.  1.168(h)-1 (like-kind exchanges of 
tax-exempt use property) does not apply. Additionally, paragraphs (c) 
through (f) of this section apply only to MACRS property for which an 
election under paragraph (i) of this section has not been made.
    (b) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Replacement MACRS property is MACRS property (as defined in 
Sec.  1.168(b)-1(a)(2)) in the hands of the acquiring taxpayer that is 
acquired for other MACRS property in a like-kind exchange or an 
involuntary conversion.
    (2) Relinquished MACRS property is MACRS property that is 
transferred by the taxpayer in a like-kind exchange, or in an 
involuntary conversion.
    (3) Time of disposition is when the disposition of the relinquished 
MACRS property takes place under the convention, as determined under 
Sec.  1.168(d)-1, that applies to the relinquished MACRS property.
    (4) Time of replacement is the later of--
    (i) When the replacement MACRS property is placed in service under 
the convention, as determined under this section, that applies to the 
replacement MACRS property; or
    (ii) The time of disposition of the exchanged or involuntarily 
converted property.
    (5) Year of disposition is the taxable year that includes the time 
of disposition.
    (6) Year of replacement is the taxable year that includes the time 
of replacement.
    (7) Exchanged basis is determined after the depreciation deductions 
for the year of disposition are determined under paragraph (c)(5)(i) of 
this section and is the lesser of--
    (i) The basis in the replacement MACRS property, as determined 
under section 1031(d) and the regulations under section 1031(d) or 
section 1033(b) and the regulations under section 1033(b); or
    (ii) The adjusted depreciable basis (as defined in Sec.  1.168(b)-
1(a)(4)) of the relinquished MACRS property.
    (8) Excess basis is any excess of the basis in the replacement 
MACRS property, as determined under section 1031(d) and the regulations 
under section 1031(d) or section 1033(b) and the regulations under 
section 1033(b), over the exchanged basis as determined under paragraph 
(b)(7) of this section.
    (9) Depreciable exchanged basis is the exchanged basis as 
determined under paragraph (b)(7) of this section reduced by--
    (i) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business (or for the production of income); and
    (ii) Any adjustments to basis provided by other provisions of the 
Internal Revenue Code (Code) and the regulations under the Code 
(including section 1016(a)(2) and (3), for example, depreciation 
deductions in the year of

[[Page 9252]]

replacement allowable under section 168(k) or 1400L(b)).
    (10) Depreciable excess basis is the excess basis as determined 
under paragraph (b)(8) of this section reduced by--
    (i) The percentage of such basis attributable to the taxpayer's use 
of property for the taxable year other than in the taxpayer's trade or 
business (or for the production of income);
    (ii) Any portion of the basis the taxpayer properly elects to treat 
as an expense under section 179; and
    (iii) Any adjustments to basis provided by other provisions of the 
Code and the regulations under the Code (including section 1016(a)(2) 
and (3), for example, depreciation deductions in the year of 
replacement allowable under section 168(k) or 1400L(b)).
    (11) Like-kind exchange is an exchange of property in a transaction 
to which section 1031(a)(1), (b), or (c) applies.
    (12) Involuntary conversion is a transaction described in section 
1033(a)(1) or (2) that resulted in the nonrecognition of any part of 
the gain realized as the result of the conversion.
    (c) Determination of depreciation allowance--(1) Computation of the 
depreciation allowance for depreciable exchanged basis beginning in the 
year of replacement--(i) In general. This paragraph (c) provides rules 
for determining the applicable recovery period, the applicable 
depreciation method, and the applicable convention used to determine 
the depreciation allowances for the depreciable exchanged basis 
beginning in the year of replacement. See paragraph (c)(5) of this 
section for rules relating to the computation of the depreciation 
allowance for the year of disposition and for the year of replacement. 
See paragraph (d)(1) of this section for rules relating to the 
computation of the depreciation allowance for depreciable excess basis. 
See paragraph (d)(4) of this section if the replacement MACRS property 
is acquired before disposition of the relinquished MACRS property in a 
transaction to which section 1033 applies. See paragraph (e) of this 
section for rules relating to the computation of the depreciation 
allowance using the optional depreciation tables.
    (ii) Applicable recovery period, depreciation method, and 
convention. The recovery period, depreciation method, and convention 
determined under this paragraph (c) are the only permissible methods of 
accounting for MACRS property within the scope of this section unless 
the taxpayer makes the election under paragraph (i) of this section not 
to apply this section.
    (2) Effect of depreciation treatment of the replacement MACRS 
property by previous owners of the acquired property. If replacement 
MACRS property is acquired by a taxpayer in a like-kind exchange or an 
involuntary conversion, the depreciation treatment of the replacement 
MACRS property by previous owners has no effect on the determination of 
depreciation allowances for the replacement MACRS property in the hands 
of the acquiring taxpayer. For example, a taxpayer exchanging, in a 
like-kind exchange, MACRS property for property that was depreciated 
under section 168 of the Internal Revenue Code of 1954 (ACRS) by the 
previous owner must use this section because the replacement property 
will become MACRS property in the hands of the acquiring taxpayer. In 
addition, elections made by previous owners in determining depreciation 
allowances for the replacement MACRS property have no effect on the 
acquiring taxpayer. For example, a taxpayer exchanging, in a like-kind 
exchange, MACRS property that the taxpayer depreciates under the 
general depreciation system of section 168(a) for other MACRS property 
that the previous owner elected to depreciate under the alternative 
depreciation system pursuant to section 168(g)(7) does not have to 
continue using the alternative depreciation system for the replacement 
MACRS property.
    (3) Recovery period and/or depreciation method of the properties 
are the same, or both are not the same--(i) In general. For purposes of 
paragraphs (c)(3) and (c)(4) of this section in determining whether the 
recovery period and the depreciation method prescribed under section 
168 for the replacement MACRS property are the same as the recovery 
period and the depreciation method prescribed under section 168 for the 
relinquished MACRS property, the recovery period and the depreciation 
method for the replacement MACRS property are considered to be the 
recovery period and the depreciation method that would have applied 
under section 168, taking into account any elections made by the 
acquiring taxpayer under section 168(b)(5) or 168(g)(7), had the 
replacement MACRS property been placed in service by the acquiring 
taxpayer at the same time as the relinquished MACRS property.
    (ii) Both the recovery period and the depreciation method are the 
same. If both the recovery period and the depreciation method 
prescribed under section 168 for the replacement MACRS property are the 
same as the recovery period and the depreciation method prescribed 
under section 168 for the relinquished MACRS property, the depreciation 
allowances for the replacement MACRS property beginning in the year of 
replacement are determined by using the same recovery period and 
depreciation method that were used for the relinquished MACRS property. 
Thus, the replacement MACRS property is depreciated over the remaining 
recovery period (taking into account the applicable convention), and by 
using the depreciation method, of the relinquished MACRS property. 
Except as provided in paragraph (c)(5) of this section, the 
depreciation allowances for the depreciable exchanged basis for any 12-
month taxable year beginning with the year of replacement are 
determined by multiplying the depreciable exchanged basis by the 
applicable depreciation rate for each taxable year (for further 
guidance, for example, see section 6 of Rev. Proc. 87-57 (1987-2 CB 
687, 692) and Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (iii) Either the recovery period or the depreciation method is the 
same, or both are not the same. If either the recovery period or the 
depreciation method prescribed under section 168 for the replacement 
MACRS property is the same as the recovery period or the depreciation 
method prescribed under section 168 for the relinquished MACRS 
property, the depreciation allowances for the depreciable exchanged 
basis beginning in the year of replacement are determined using the 
recovery period or the depreciation method that is the same as the 
relinquished MACRS property. See paragraph (c)(4) of this section to 
determine the depreciation allowances when the recovery period or the 
depreciation method of the replacement MACRS property is not the same 
as that of the relinquished MACRS property.
    (4) Recovery period or depreciation method of the properties is not 
the same. If the recovery period prescribed under section 168 for the 
replacement MACRS property (as determined under paragraph (c)(3)(i) of 
this section) is not the same as the recovery period prescribed under 
section 168 for the relinquished MACRS property, the depreciation 
allowances for the depreciable exchanged basis beginning in the year of 
replacement are determined under this paragraph (c)(4). Similarly, if 
the depreciation method prescribed under section 168 for the 
replacement MACRS property (as determined under paragraph (c)(3)(i) of 
this section) is not the same as the depreciation method prescribed 
under

[[Page 9253]]

section 168 for the relinquished MACRS property, the depreciation 
method used to determine the depreciation allowances for the 
depreciable exchanged basis beginning in the year of replacement is 
determined under this paragraph (c)(4).
    (i) Longer recovery period. If the recovery period prescribed under 
section 168 for the replacement MACRS property (as determined under 
paragraph (c)(3)(i) of this section) is longer than that prescribed for 
the relinquished MACRS property, the depreciation allowances for the 
depreciable exchanged basis beginning in the year of replacement are 
determined as though the replacement MACRS property had originally been 
placed in service by the acquiring taxpayer in the same taxable year 
the relinquished MACRS property was placed in service by the acquiring 
taxpayer, but using the longer recovery period of the replacement MACRS 
property (as determined under paragraph (c)(3)(i) of this section) and 
the convention determined under paragraph (c)(4)(v) of this section. 
Thus, the depreciable exchanged basis is depreciated over the remaining 
recovery period (taking into account the applicable convention) of the 
replacement MACRS property.
    (ii) Shorter recovery period. If the recovery period prescribed 
under section 168 for the replacement MACRS property (as determined 
under paragraph (c)(3)(i) of this section) is shorter than that of the 
relinquished MACRS property, the depreciation allowances for the 
depreciable exchanged basis beginning in the year of replacement are 
determined using the same recovery period as that of the relinquished 
MACRS property. Thus, the depreciable exchanged basis is depreciated 
over the remaining recovery period (taking into account the applicable 
convention) of the relinquished MACRS property.
    (iii) Less accelerated depreciation method--(A) If the depreciation 
method prescribed under section 168 for the replacement MACRS property 
(as determined under paragraph (c)(3)(i) of this section) is less 
accelerated than that of the relinquished MACRS property at the time of 
disposition, the depreciation allowances for the depreciable exchanged 
basis beginning in the year of replacement are determined as though the 
replacement MACRS property had originally been placed in service by the 
acquiring taxpayer at the same time the relinquished MACRS property was 
placed in service by the acquiring taxpayer, but using the less 
accelerated depreciation method. Thus, the depreciable exchanged basis 
is depreciated using the less accelerated depreciation method.
    (B) Except as provided in paragraph (c)(5) of this section, the 
depreciation allowances for the depreciable exchanged basis for any 12-
month taxable year beginning in the year of replacement are determined 
by multiplying the adjusted depreciable basis by the applicable 
depreciation rate for each taxable year. If, for example, the 
depreciation method of the replacement MACRS property in the year of 
replacement is the 150-percent declining balance method and the 
depreciation method of the relinquished MACRS property in the year of 
replacement is the 200-percent declining balance method, and neither 
method had been switched to the straight line method in the year of 
replacement or any prior taxable year, the applicable depreciation rate 
for the year of replacement and subsequent taxable years is determined 
by using the depreciation rate of the replacement MACRS property as if 
the replacement MACRS property was placed in service by the acquiring 
taxpayer at the same time the relinquished MACRS property was placed in 
service by the acquiring taxpayer, until the 150-percent declining 
balance method has been switched to the straight line method. If, for 
example, the depreciation method of the replacement MACRS property is 
the straight line method, the applicable depreciation rate for the year 
of replacement is determined by using the remaining recovery period at 
the beginning of the year of disposition (as determined under this 
paragraph (c)(4) and taking into account the applicable convention).
    (iv) More accelerated depreciation method--(A) If the depreciation 
method prescribed under section 168 for the replacement MACRS property 
(as determined under paragraph (c)(3)(i) of this section) is more 
accelerated than that of the relinquished MACRS property at the time of 
disposition, the depreciation allowances for the replacement MACRS 
property beginning in the year of replacement are determined using the 
same depreciation method as the relinquished MACRS property.
    (B) Except as provided in paragraph (c)(5) of this section, the 
depreciation allowances for the depreciable exchanged basis for any 12-
month taxable year beginning in the year of replacement are determined 
by multiplying the adjusted depreciable basis by the applicable 
depreciation rate for each taxable year. If, for example, the 
depreciation method of the relinquished MACRS property in the year of 
replacement is the 150-percent declining balance method and the 
depreciation method of the replacement MACRS property in the year of 
replacement is the 200-percent declining balance method, and neither 
method had been switched to the straight line method in the year of 
replacement or any prior taxable year, the applicable depreciation rate 
for the year of replacement and subsequent taxable years is the same 
depreciation rate that applied to the relinquished MACRS property in 
the year of replacement, until the 150-percent declining balance method 
has been switched to the straight line method. If, for example, the 
depreciation method is the straight line method, the applicable 
depreciation rate for the year of replacement is determined by using 
the remaining recovery period at the beginning of the year of 
disposition (as determined under this paragraph (c)(4) and taking into 
account the applicable convention).
    (v) Convention. The applicable convention for the exchanged basis 
is determined under this paragraph (c)(4)(v).
    (A) Either the relinquished MACRS property or the replacement MACRS 
property is mid-month property. If either the relinquished MACRS 
property or the replacement MACRS property is property for which the 
applicable convention (as determined under section 168(d)) is the mid-
month convention, the exchanged basis must be depreciated using the 
mid-month convention.
    (B) Neither the relinquished MACRS property nor the replacement 
MACRS property is mid-month property. If neither the relinquished MACRS 
property nor the replacement MACRS property is property for which the 
applicable convention (as determined under section 168(d)) is the mid-
month convention, the applicable convention for the exchanged basis is 
the same convention that applied to the relinquished MACRS property. If 
the relinquished MACRS property is placed in service in the year of 
disposition, and the time of replacement is also in the year of 
disposition, the convention that applies to the relinquished MACRS 
property is determined under paragraph (f)(1)(i) of this section. If, 
however, relinquished MACRS property was placed in service in the year 
of disposition and the time of replacement is in a taxable year 
subsequent to the year of disposition, the convention that applies to 
the exchanged basis is the convention that applies in that

[[Page 9254]]

subsequent taxable year (see paragraph (f)(1)(ii) of this section).
    (5) Year of disposition and year of replacement. No depreciation 
deduction is allowable for MACRS property disposed of by a taxpayer in 
a like-kind exchange or involuntary conversion in the same taxable year 
that such property was placed in service by the taxpayer. If 
replacement MACRS property is disposed of by a taxpayer during the same 
taxable year that the relinquished MACRS property is placed in service 
by the taxpayer, no depreciation deduction is allowable for either 
MACRS property. Otherwise, the depreciation allowances for the year of 
disposition and for the year of replacement are determined as follows:
    (i) Relinquished MACRS property--(A) General rule. Except as 
provided in paragraphs (c)(5)(i)(B), (c)(5)(iii), (e), and (i) of this 
section, the depreciation allowance in the year of disposition for the 
relinquished MACRS property is computed by multiplying the allowable 
depreciation deduction for the property for that year by a fraction, 
the numerator of which is the number of months (including fractions of 
months) the property is deemed to be placed in service during the year 
of disposition (taking into account the applicable convention of the 
relinquished MACRS property), and the denominator of which is 12. In 
the case of termination under Sec.  1.168(i)-1(e)(3)(v) of general 
asset account treatment of an asset, or of all the assets remaining, in 
a general asset account, the allowable depreciation deduction in the 
year of disposition for the asset or assets for which general asset 
account treatment is terminated is determined using the depreciation 
method, recovery period, and convention of the general asset account. 
This allowable depreciation deduction is adjusted to account for the 
period the asset or assets is deemed to be in service in accordance 
with this paragraph (c)(5)(i).
    (B) Special rule. If, at the beginning of the year of disposition, 
the remaining recovery period of the relinquished MACRS property, 
taking into account the applicable convention of such property, is less 
than the period between the beginning of the year of disposition and 
the time of disposition, the depreciation deduction for the 
relinquished MACRS property for the year of disposition is equal to the 
adjusted depreciable basis of the relinquished MACRS property at the 
beginning of the year of disposition. If this paragraph applies, the 
exchanged basis is zero and no depreciation is allowable for the 
exchanged basis in the replacement MACRS property.
    (ii) Replacement MACRS property--(A) Remaining recovery period of 
the replacement MACRS property. The replacement MACRS property is 
treated as placed in service at the time of replacement under the 
convention that applies to the replacement MACRS property as determined 
under this paragraph (c)(5)(ii). The remaining recovery period of the 
replacement MACRS property at the time of replacement is the excess of 
the recovery period for the replacement MACRS property, as determined 
under paragraph (c) of this section, over the period of time that the 
replacement MACRS property would have been in service if it had been 
placed in service when the relinquished MACRS property was placed in 
service and removed from service at the time of disposition of the 
relinquished MACRS property. This period is determined by using the 
convention that applied to the relinquished MACRS property to determine 
the date that the relinquished MACRS property is deemed to have been 
placed in service and the date that it is deemed to have been disposed 
of. The length of time the replacement MACRS property would have been 
in service is determined by using these dates and the convention that 
applies to the replacement MACRS property.
    (B) Year of replacement is 12 months. Except as provided in 
paragraphs (c)(5)(iii), (e), and (i) of this section, the depreciation 
allowance in the year of replacement for the depreciable exchanged 
basis is determined by--
    (1) Calculating the applicable depreciation rate for the 
replacement MACRS property as of the beginning of the year of 
replacement taking into account the depreciation method prescribed for 
the replacement MACRS property under paragraph (c)(3) of this section 
and the remaining recovery period of the replacement MACRS property as 
of the beginning of the year of disposition as determined un