A like-kind exchange is just that, an exchange of things that are similar. Some would say that a Volkswagen Beetle and a Jaguar are not similar, but for tax purposes they could both be business vehicles. The like-kind exchange can be a very useful method for deferring gains on depreciated business vehicles.

If you have a business vehicle, you may or may not want to drive it for 200,000 miles until it totally craps out. Assuming you don’t want to do that and every few years you want a new business vehicle, a like-kind exchange might be the way to go. With the bonus depreciation and Section 179 rules, your business vehicle might not have any tax basis remaining if you took depreciation on all of it already. That 4-year old vehicle might be worth $10,000 and if you sell it, you will recognize a gain of $10,000.

If you trade in that vehicle when you purchase your new vehicle, you can defer that gain of $10,000. Your basis in the new vehicle is calculated to be your basis in the old vehicle plus the cash paid at purchase time. There isn’t any gain recognized. The best part is you can keep doing this every few years when you want a newer business vehicle. The like-kind exchange only works if you trade in the vehicle to the same dealer you are purchasing from. You can’t sell your old vehicle to the Chevy dealer and then go across the street to the Honda dealer and buy a new car. It has to all take place in one transaction. Pretty simple way to defer the gain on your old business vehicles, but wait! This has other applications too. Don’t worry – that post is coming soon.

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