Treas. Reg. 1.168(i)-6 — Like-Kind Exchange Depreciation

Where this comes from

Before this regulation was finalized in 2004, the rules for depreciating property acquired in a 1031 exchange were unclear. Treasury Decision 9115 clarified how MACRS applies when the purchase price includes both a carryover basis from the old property and new dollars paid above that amount.

What it established

The regulation creates a two-pool system for post-exchange depreciation.

The exchanged basis is whatever carryover basis the taxpayer brings from the relinquished property. It continues on that property's remaining recovery period, using the same method and convention. No fresh start, no new bonus election.

The excess basis is the additional amount paid above the exchanged basis. It is treated as newly placed-in-service property at the acquisition date of the replacement. It gets its own recovery period, method, and convention. If the acquisition date falls within a bonus-eligible window, the excess basis components may qualify for full or partial bonus depreciation.

How it shows up in a study

After a 1031 exchange, the replacement property has a mixed basis. A cost segregation study on that property needs to allocate both the exchanged basis and the excess basis across the asset classes identified.

For the excess basis, the study applies the normal classification rules: 5-year, 7-year, 15-year, and 39-year components. The excess basis assigned to short-life components may qualify for bonus depreciation, producing an immediate first-year deduction.

For the exchanged basis, the study confirms the asset class of each component and continues depreciation on the old schedule. This ensures the two pools are tracked correctly and that bonus is not claimed on the portion that does not qualify.

What it does not mean

This regulation does not create a second chance to apply bonus depreciation to the full purchase price of a replacement property. Only the excess basis, the new dollars paid above the carryover, gets treated as newly placed in service.

The two-pool approach also requires careful record-keeping. The exchanged basis must be traced to specific components of the relinquished property so the correct remaining recovery periods apply. A study that ignores this distinction and treats the full replacement price as new property overstates the bonus-eligible amount.