In a non-taxable exchange, you do not have to pay tax on any gain, and you are not allowed to deduct a loss. A non-taxable exchange normally occurs when similar property is exchanged. This is commonly referred to as a like-kind exchange. In order to qualify as a non-taxable exchange, both the property you transfer and the property you receive must have been for business use. Any exchange expenses you have to pay, such as closing costs, are added to the basis of the property you receive.
If you trade property and also pay money in a like-kind exchange, the basis of the property you receive is the basis of the property you give up plus the money you pay, rather than the value of the replacement property. This would be the case when you trade in a used vehicle for a new one, for example.
Property Received as a Gift
If you receive property as a gift and use the property in your business, your basis for calculating depreciation or amortization is the donor’s adjusted basis in the property. If you subsequently sell or dispose of the property, for purposes of calculating any taxable gain or loss, you will need to know:
The fair market value of the property when you received it as a gift
The donor’s adjusted basis in the property
Any gift tax paid
Your basis in the property for purposes of calculating gain or loss on a subsequent sale or other disposal will depend on whether the fair market value of the property was more or less than the donor’s adjusted basis at the time of the gift, plus or minus any adjustments to that basis while you held the property (capital improvements, casualty loss, etc.). And, if the fair market value of the property was equal to or greater than the donor’s adjusted basis at the time of the gift, you will increase the basis by all or part of the gift tax, depending on whether the gift was made before or after December 31, 1976. This will only be a tax consideration if you subsequently sell or dispose of the property. For purposes of recording depreciation on the property, you would use the donor’s adjusted basis.