Tax Attic: Non-taxable exchange

The summer is just beginning and it’s time to do my annual battle with those pesky critters called moles. Deb has her regular list of lawn and garden items to complete including digging up, splitting, re-planting, and giving away the split-off clumps of decorative grasses.  It includes thinning-out the various varieties of hostas; our trip out to Allendale and other closer places to buy a truck full of flowers and fillers for the incredible number of pots that Deb maintains around the yard; and digging out a bush now and then that needs re-placing.  That routine list is topped off by the fight against moles.  Our house is located along the river so animals have rather easy access to our backyard.  Over the years, we have been visited by deer, possum, raccoon, plenty of squirrels, birds of all variety including turkey and ducks, and various stray but lost dogs.  The downside of easy access is moles can also make their way up from the river. Some years, it’s such a busy route; it’s like 131 going to Traverse City on a Friday afternoon or I-96 going toward Chicago.  The moles can be over-whelming. To say they can be destructive is an under-statement. My best hope is they go to my neighbor’s yards. Sorry Bob and Mary and Brenda.  Of course, they may be thinking their best hope is for the moles to go to Deb and Jerry’s yard. It’s a season long battle.  Wish me luck when you see me at Ace Hardware buying the latest gadgets and chemicals that promise to take care of every pesky mole.

My regular day job as a tax professional never seems to go away either. The Tax Cuts and Job Act (TCJA) took care of the recently completed tax season; is taking care of this summer and probably will do so for the next few years. One of my evening jobs is writing this article for the Squire.  I usually can come up with something to write about but the TCJA has given me a treasure trove of continuing raw material.  This week, allow me to discuss another important TCJA change.  People in business have traditionally been able to trade in used equipment for a piece of new or used equipment without paying tax on the trade transaction. This is called a non-taxable exchange.  As of January 1, 2018, the non-taxable exchange feature for personal property or equipment has been eliminated. Let’s look at an example of how the non-taxable exchange provision actually works. A taxpayer, Jim, in the construction business, purchased a Kubota tractor seven years ago for $20,000 and has fully written that $20,000 off on his tax returns over those seven years. On December 31, 2017, he trades in the Kubota on a new John Deere.  The new one costs $57,000 but the dealer gives Jim a $17,000 trade in value so Jim owes a net amount of $40,000.  Under the rules in effect on December 31, Jim made a non-taxable exchange of the old Kubota for the new John Deere.  He doesn’t pay tax on the trade-in value of  $17,000.  He just reduces the new John Deere’s depreciable basis down by the $17,000 and writes-off the lower adjusted cost basis of $40,000.  However, let’s change the trade-in date to January 1, 2018 using the same exact scenario.  The kicker is Congress passed the TCJA and eliminated the non-taxable exchange provision for trade-ins, sales, and purchases that occur on or after January 1, 2018.  Now Jim has a taxable sale of the old Kubota for $17,000 and has to include the $17,000 as income.  He now depreciates the full purchase price of $57,000 for the new John Deere.  He may or may not be able to write-off enough to offset the $17,000 of taxable gain from the Kubota but it does make Jim’s taxes more complicated.  There are a myriad of changes like this made by the TCJA.  I will continue to bring them up in the coming months.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland dr in Rockford.

Contact Jerry at