Do I Need To Do a 1031 Exchange of Machinery, Equipment Or Aircraft If I Can Write-Off The Entire Purchase Price In 2011?

The 2010 Tax Relief Act ramped up the amount of write-off for 2011 equipment purchases. Two provisions of the Internal Revenue Code make it possible for purchasers to deduct the entire purchase cost of machinery, equipment and aircraft.

100% Bonus Depreciation - Taxpayers can deduct the entire purchase price of new equipment purchased in 2011 under the rules for “Bonus Depreciation.” Before 2011 the deduction was limited to 50% of the purchase price of the equipment. The 50% rule will apply again in 2012. The original use of the equipment must commence with the taxpayer – used equipment doesn’t count.

The Section 179 Deduction – Up to $500,000 of the cost of new or used equipment can be deducted in 2011 under Code Section 179. However, there are special rules for the Section 179 Deduction. Certain types of purchases are not eligible for the 179 Deduction, including –

• Property which is not used in a trade or business,
• Property acquired from a related party,
• Property which is leased to another user or lessee,
• Property acquired in a 1031 Exchange

The $500,000 deduction phases out for taxpayers purchasing more than
$2 million in machinery or equipment during the year. The maximum deduction and phaseout levels drop to $25,000 and $200,000 beginning in 2012. The 179 Deduction is limited to income reported for the year from the taxpayer’s trade or business and cannot result in a loss being reported. Excess deductions can be carried forward.

Sales taxes are often a motivating reason a taxpayer may want to structure a 1031 Exchange regardless of the possible first-year write-offs referred to above. For example, if a taxpayer sells an aircraft for $1 million and buys a replacement aircraft for $2 million, sales tax will apply to the $2 million purchase price of the replacement aircraft. If the taxpayer engages the services of an Exchange Intermediary to help him structure a qualifying “exchange,” the sales tax is limited to the “boot paid” - $1 million in this case. The difference in sales tax liability can obviously be significant.

These issues must be discussed with your tax professional for complete information on how these rules may affect you in your circumstances. Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.