The final regs still maintain a step-in-the-shoes requirement for depreciating property acquired in an LKE. For those of you not familiar with this process, you have to split the depreciation on LKE replacement property into two pieces. These parts consist of (1) the remaining basis of the relinquished property that is carried over to the replacement property and (2) what is called the depreciable excess basis, which represents any additional consideration paid to acquire the replacement property. If the properties have the same recovery class and depreciation method, the remaining basis of the old property is written off over what is left of its recovery period. The depreciable excess basis is treated like separate property and is depreciated over the applicable recovery period of the asset.
As an example, assume you have forklifts with a tax basis $200,000 and three years of depreciation remaining. If you exchanged the old forklifts for new forklifts worth $500,000, you would depreciate the new forklifts in two pieces. The $200,000 piece would be depreciated using the MACRS percentages over the remaining three years, while the remaining $300,000 would be depreciated using MACRS over the next six years (assuming a 5-year class life, of course). However, under the final regs, you can elect out of the split basis approach if the LKE property acquired replaces depreciable property for which you made an election to use an alternative depreciation method such as the unit of production method. The final regs also retain the proscription against a taxpayer taking depreciation on relinquished property during the period between the disposition of that property and the acquisition of the replacement property.
Unfortunately, the final regs did nothing to simplify the LKE requirements. They still are extremely complex and can be burdensome if you are running numerous LKEs during the year. Fortunately, the new LKE software programs from vendors like Accruit and PWC remove most of the burden from the process, thereby making it manageable and economical.
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