Acquiring Business Assets
Do You Have a Taxable Sale or a Tax-free Exchange?
The most common way of obtaining business assets is by purchase. Other
times, you acquire assets by trading in old or outdated equipment for new
equipment. The nature of the transaction dictates whether you have a
taxable sale or a tax-deferred like-kind exchange.
If you sell an asset
and use the proceeds to acquire a new asset, generally the transaction is
considered a taxable sale. If the proceeds from the sale are under your
control, a sale has occurred and you will pay tax on any recognized gain.
If you trade in old equipment for new equipment, the transaction is
treated as a like-kind exchange because you are transferring your property
in exchange for replacement property. The dealer will adjust the purchase
price by an amount that is allowed as the trade-in value and you’ll pay
any difference in cash or financing. The like-kind exchange rules are
mandatory. In other words, your transaction is treated as an exchange
rather than a sale.
The cost of the new asset that you are allowed to
depreciate is equal to the remaining basis of your old asset plus any
additional amounts you pay. In turn, you are not required to report the
transaction as a taxable sale. Keep in mind, however, that any cash you
receive on the deal is taxable.