# Like-Kind Exchange of Equipment (1031)

Canonical URL: https://fundmyequipment.com/learn/like-kind-exchange-equipment/
Last modified: 2026-05-29T19:39:17+00:00
Type: efin_guide

## Summary

Like-Kind Exchange of Equipment (1031). Comprehensive guide.

## Content

Like-kind exchanges (1031 exchanges) used to allow tax-deferred trading of business equipment. The Tax Cuts and Jobs Act of 2017 eliminated 1031 treatment for personal property starting in 2018. Equipment trades are now taxable events.

Pre-2018 rules (historical)

Under prior law, IRC Section 1031 allowed taxpayers to defer gain on the exchange of like-kind business property. For equipment:

Trading old equipment for new equipment of similar type deferred gain
Basis carried over from old to new equipment
Depreciation continued from carried-over basis
Boot (cash paid in exchange) was taxable to the extent of gain


This significantly benefited equipment-heavy businesses that traded equipment frequently.

2018 and forward (current law)

The TCJA limited 1031 to real property. Personal property (equipment) exchanges are now taxable. Effects:


Trade-in transactions now recognize gain or loss
The new equipment's basis is its purchase price (not carried over)
Depreciation starts fresh on new equipment's full purchase price
No more deferral on equipment swaps


What this means for trade-ins

Suppose you trade in equipment with $20,000 adjusted basis for $50,000 trade credit on new equipment costing $150,000.

Pre-2018:

No gain recognized on trade
New equipment basis: $20,000 (carried over) + $100,000 cash = $120,000
Section 179 / bonus on $120,000 basis


2018+:

Sale recognized: $50,000 trade value - $20,000 adjusted basis = $30,000 gain (likely ordinary income via depreciation recapture)
New equipment basis: $150,000 (full purchase price)
Section 179 / bonus on $150,000 basis


Net effect: $30,000 gain taxed now, but $30,000 more basis available for Section 179 / bonus depreciation. Often roughly tax-neutral if you can fully expense the new equipment.

Why this generally is not bad

With Section 179 and bonus depreciation, businesses can often fully expense the new equipment in year 1. The gain from the old equipment is offset by deductions on the new equipment.

The math:

Recognized gain: $30,000 (ordinary income)
New equipment Section 179 / bonus: $150,000 (deduction)
Net effect on taxable income: -$120,000


Even better than the old like-kind exchange, in many scenarios, because you get more basis for deductions.

When the math is worse

Loss of 1031 hurts when:

You cannot fully expense the new equipment (Section 179 phased out, bonus reduced)
State conformity adjustments reduce the Section 179 / bonus benefit
Trade-ins were frequent and depreciation had carried over multiple times
The gain is at higher tax rate than the deduction's value


Real property 1031 still works

If you swap real property (land, buildings) used in business for like-kind real property, 1031 deferral still applies. This is significant for:

Selling a warehouse and buying another
Selling a manufacturing facility and replacing it
Real estate investment trades


But equipment swaps are out.

Sale-leaseback alternatives

Some operators use sale-leasebacks to access cash from existing equipment while continuing to use it:

Sell equipment to a leasing company
Lease it back from them for ongoing use
Receive sale proceeds as cash


Sale-leasebacks are taxable sale events but provide working capital without losing equipment use.

Depreciation recapture on equipment sales

When you sell equipment for more than its adjusted basis, the gain is taxed as ordinary income up to the amount of depreciation previously claimed (depreciation recapture under Section 1245).

Example: Equipment originally cost $100,000. Fully depreciated to $0 basis. Sold for $40,000.

Gain: $40,000
Depreciation recapture: $40,000 (less than total $100K depreciation claimed)
Treated as ordinary income at your tax rate


This applies on every equipment sale or trade.

Tax planning around equipment disposal

Strategies under current law:

Time disposal with new equipment purchase. Section 179 on new equipment offsets gain from disposal.
Avoid related-party transactions. Related-party transactions trigger anti-loss rules.
Consider trade-in vs sell-and-buy. Math is similar; trade-in is simpler logistically.
Spread disposals across years. If multiple equipment sales would create a single-year tax spike, time across years.


What is still tax-free for equipment

Limited options:

Gifts to qualifying charities (donation of equipment)
Transfers to wholly-owned subsidiaries (Section 351 contribution)
Casualty losses on involuntary conversions (with strict rules)


Most equipment disposals are taxable events.

Common questions

Can I do a 1031 exchange of trucks for trucks? No, not since 2018. All equipment exchanges are taxable.

What if I trade in equipment for the same brand and type? Still taxable.

Does this affect operating leases? No. Operating lease structures are not exchanges and were not affected by the TCJA change.

What about state taxes? Most states conform to federal treatment. A few decoupled and may treat exchanges differently.

Action steps


Understand current law (no 1031 on equipment)
Plan equipment trades knowing they are taxable
Coordinate disposal timing with new equipment purchases
Calculate gain recognition and Section 179 / bonus offset
Consult CPA before complex equipment exchanges