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Figuring the Deduction for Property Acquired in a Nontaxable Exchange: Business Depreciation (2025 IRS Guide)

This guide covers “Figuring the Deduction for Property Acquired in a Nontaxable Exchange” within business depreciation. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 946 (2025), How To Depreciate Property, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that apply to your property. Then, you are ready to figure your depreciation deduction. You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table.

Figuring the Deduction for Property Acquired in a Nontaxable Exchange

If your property has a carryover basis because you acquired it in a nontaxable transfer such as a like-kind exchange or involuntary conversion, you must generally figure depreciation for the property as if the transfer had not occurred. However, see Like-kind exchanges and involuntary conversions, earlier, in chapter 3 under How Much Can You Deduct; and Property Acquired in a Like-Kind Exchange or Involuntary Conversion next.

Property Acquired in a Like-Kind Exchange or Involuntary Conversion

You must generally depreciate the carryover basis of property acquired in a like-kind exchange or involuntary conversion over the remaining recovery period of the property exchanged or involuntarily converted. You also generally continue to use the same depreciation method and convention used for the exchanged or involuntarily converted property. This applies only to acquired property with the same or a shorter recovery period and the same or more accelerated depreciation method than the property exchanged or involuntarily converted. The excess basis (the part of the acquired property’s basis that exceeds its carryover basis), if any, of the acquired property is treated as newly placed in service property.

For acquired property that has a longer recovery period or a less accelerated depreciation method than the exchanged or involuntarily converted property, you must generally depreciate the carryover basis of the acquired property as if it were placed in service in the same tax year as the exchanged or involuntarily converted property. You also generally continue to use the longer recovery period and less accelerated depreciation method of the acquired property.

If the MACRS property you acquired in the exchange or involuntary conversion is a new qualified property, discussed earlier in chapter 3 under What Is Qualified Property, you can claim a special depreciation allowance on at least a portion of the carryover basis. Special rules apply to vehicles acquired in a trade-in before 2018. For information on how to figure depreciation for a vehicle acquired in a trade-in that is subject to the passenger automobile limits, see Deductions for Passenger Automobiles Acquired in a Trade-In under Do the Passenger Automobile Limits Apply? in chapter 5.

Caution:

Like-kind exchanges completed after December 31, 2017, are generally limited to exchanges of real property not held primarily for sale.

Election out.

Instead of using the above rules, you can elect, for depreciation purposes, to treat the adjusted basis of the exchanged or involuntarily converted property as if disposed of at the time of the exchange or involuntary conversion. Treat the carryover basis and excess basis, if any, for the acquired property as if placed in service the later of the date you acquired it or the time of the disposition of the exchanged or involuntarily converted property. The depreciable basis of the property acquired is the carryover basis of the property exchanged or involuntarily converted plus any excess basis. The election, if made, applies to both the acquired property and the exchanged or involuntarily converted property. This election does not affect the amount of gain or loss recognized on the exchange or involuntary conversion or the amount of the special depreciation allowance.

When to make the election.

You must make the election on a timely filed return (including extensions) for the year of replacement. The election must be made separately by each person acquiring replacement property. In the case of a partnership, an S corporation, or a consolidated group, the election is made by the partnership, by the S corporation, or by the common parent of a consolidated group, respectively. Once made, the election may not be revoked without IRS consent. Note that by making this election, it does not change whether the basis is subject to bonus depreciation, but rather only effects how the depreciation is calculated. See Like-kind exchanges and involuntary conversions under How Much Can You Deduct? in chapter 3.

For more information and special rules, see the Instructions for Form 4562.

Property Acquired in a Nontaxable Transfer

You must depreciate MACRS property acquired by a corporation or partnership in certain nontaxable transfers over the property’s remaining recovery period in the transferor’s hands, as if the transfer had not occurred. You must continue to use the same depreciation method and convention as the transferor. You can depreciate the part of the property’s basis that exceeds its carryover basis (the transferor’s adjusted basis in the property) as newly purchased MACRS property.

The nontaxable transfers covered by this rule include the following.

  • A distribution in complete liquidation of a subsidiary.

  • A transfer to a corporation controlled by the transferor.

  • An exchange of property solely for corporate stock or securities in a reorganization.

  • A contribution of property to a partnership in exchange for a partnership interest.

  • A partnership distribution of property to a partner.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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