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Michigan Business Tax
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B22. How is a like-kind exchange treated under the MBT?
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Answer:
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Generally, for federal income tax purposes, business or investment property exchanged solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange other (not like-kind) property or money is received, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
To the extent the like-kind exchange is or is not recognized for federal income tax purposes, the MBT Business Income tax base will recognize a similar amount. MBT Business Income means that part of federal taxable income derived from business activity. MCL 208.1105(2).
Like the SBT, the value of property received in a like-kind exchange will be excluded from gross receipts. If, as part of the exchange other (not like-kind) property or money is received and gain is recognized for federal income tax purposes, the gain will be included in gross receipts. Losses that are not recognized for federal income tax purposes similarly are not recognized for MBT and do not reduce gross receipts for the MBT.
Transfers of property in a like-kind exchange are not dispositions and do not cause the recapture of ITC. The transferor is not required to recapture ITC on the transferred property and the transferee is not entitled to ITC on the property received. However, when property that was exchanged in a like-kind exchange is disposed of, the acquisition date of the disposed property will be considered the date the original property was acquired to determine if the disposition causes recapture of ITC.
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