Could a partnership claim extra Illinois depreciation by ignoring federal Section 1031 basis reduction when the relinquished property was outside Illinois?

Plain-English summary

The partnership could not claim additional Illinois depreciation from a state-only higher basis in the replacement property. Federal Section 1031 treatment reduced the replacement property's federal basis by deferred gain, even though the relinquished property was outside Illinois.

Illinois began with the partnership's federal taxable income and allowed only modifications expressly stated in Section 203. Because no Illinois provision changed the federal like-kind-exchange treatment or depreciation deductions, IDOR upheld the disallowance.

What this means for you

Do not create a separate Illinois basis for exchange property without a specific statutory modification. Start with the properly computed federal basis and depreciation.

Common questions

Q: Did the out-of-state location of the relinquished property eliminate Illinois's federal starting point?
A: No. IDOR found no Illinois modification for that fact.

Q: Could the partnership subtract the difference between cost-basis and federal-basis depreciation?
A: No. The additional depreciation subtraction was disallowed.

Citations and references

• 35 ILCS 5/203(d)(1), (d)(2), (e)(2)(H), (h)
• IRC §§ 703, 1031

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100002.pdf

Original ruling text

IT 10-0002-GIL 01/04/2010 SUBTRACTION MODIFICATIONS – OTHER RULINGS
General Information Letter: No subtraction is allowed for depreciation on gain deferred
under IRC Section 1031 on the exchange of property located outside Illinois.
January 4, 2010
Dear:
This is in response to your letter dated September 1, 2009, which was forwarded to me for response.
The nature of your letter and the information you have provided require that we respond with a
General Information Letter, which is designed to provide general information, is not a statement of
Department policy and is not binding on the Department. See 86 Ill. Adm. Code 1200.120(b) and (c),
which may be found on the Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
The above-named client has requested that I respond to the enclosed notice dated
August 12, 2009. This notice states that you have disallowed the amount claimed as
“Other Subtractions”. The “other subtraction” claimed on the original return is additional
depreciation due to a depreciable basis that is different for Illinois than for federal
purposes. A detailed explanation of this difference was attached to the return and
another copy is enclosed with this letter.
The explanation attached to the return states, in part:
During 2005, the partnership purchased Illinois rental real estate at a cost of
$1,895,745. For Federal tax purposes, this property is qualified as the replacement
property in a Section 1031 like-kind exchange. Therefore, for Federal purposes, the
basis of the property received in the exchange was reduced by the deferred gain,
resulting in a basis of $962,807. . . .
There is no deferred gain applicable to this exchange for Illinois purposes, because the
property given up in the exchange was not located in Illinois. Therefore, for Illinois
purposes, the basis of the property is the original cost of $1,895,745.
Response
Under Section 203(d)(1) of the Illinois Income Tax Act (35 ILCS 5/203), the computation of a
partnership’s "net income" taxed by Illinois begins with the partnership's federal taxable income, as
properly computed for the taxable year. Section 203(e)(2)(H) provides that, for a partnership, “federal
taxable income” means “taxable income determined in accordance with Section 703 of the Internal
Revenue Code, except that taxable income shall take into account those items which are required by
Section 703(a)(1) to be separately stated but which would be taken into account by an individual in
calculating his taxable income.” Under Section 203(d)(2), various addition and subtraction
modifications are then made, and the resulting "base income" is then allocated and apportioned to
Illinois. Section 203(h) provides that no modification may be made to taxable income unless
expressly provided in Section 203.
There is no provision in the Illinois Income Tax Act that modifies the federal income tax treatment of a
like-kind exchange under Section 1031 of the Internal Revenue Code, or of the federal depreciation
deductions allowed for property acquired through a Section 1031 exchange. Accordingly, the

IT 10-0002-GIL
January 4, 2010
Page 2
subtraction claimed on the return was properly disallowed under Section 203(h).
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax