Exchanges of Aircraft and Equipment Can Still Save Taxes Even Though the 2010 Tax Relief Act Permits a 100% Write-Off for Replacement Purchases

For Aircraft and Equipment purchased and placed in service after 09/08/10 and before 2012 the up-front §168(k) Bonus Depreciation deduction is increased to 100% by the 2010 Tax Relief Act. If a taxpayer sells aircraft or equipment during this time frame, the entire taxable income from the sale, including depreciation recapture, can be offset by the purchase of NEW aircraft or equipment during the same tax year. The replacement property has to be NEW.

Does this make a 1031 exchange of aircraft or equipment obsolete or unproductive for a taxpayer purchasing NEW replacement property? Partially but not entirely.

We recently had a client who was exchanging a $1 million aircraft for a $2 million replacement aircraft. His exchange was failing under Code Section 1031 because he couldn’t acquire the replacement aircraft within the required 180-day replacement period. But, he was saving $50,000 in sales taxes with his exchange. His sales tax was based on the boot paid for the replacement aircraft ($1 million). Had he not been doing an exchange, his sales tax would have been based on the entire cost of the replacement aircraft ($2 million). The exchange saved this taxpayer $50,000 in sales taxes.

What if the taxpayer is replacing with USED replacement aircraft or equipment? Well, maybe the taxpayer can offset a sale with the purchase cost of the replacement property under Code §179 even though it is not eligible for the bonus depreciation write-off under the 100% Bonus Depreciation rules of §168(k). But, Section 179 deductions are limited to $500,000 in total and phase out for a taxpayer with purchases in excess of $2 million for the year.

In any event, sales tax savings can be substantial and taxpayers and their advisors need to take a look at sales tax issues before they decide that an aircraft or equipment exchange will not be helpful.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. Our Exchange Manual is also available free of charge at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for real estate professionals, CPAs and investors.

FirstBank at the Colorado Rockies Season Opener

1031 Corporation is a wholly-owned subsidiary of FirstBank. While we try to highlight the safety and soundness of our parent company, the bank recently made an aerial effort to highlight its long-standing belief that fiscal responsibility starts with the way a company you do business with spends its money. This banner flew over LoDo Denver above Coors Field on the Colorado Rockies 2009 opening day last Friday.



In case you can't read the banner, it says: "This is the closest thing we have to a private jet"....with the FirstBank logo.



Oh, by the way, 1031 Corporation does aircraft exchanges...in case you are considering exchanging a single prop, like the one in the photo, for that private jet.

Have a great weekend!

Aircraft Exchanges

If you have used an aircraft for trade or business purposes, a 1031 exchange of aircraft could save you thousands of dollars on the sale and replacement. Chances are you have depreciated the aircraft, perhaps even completely. The aircraft may be worth more today than when you purchased it. If you sell it without doing a 1031 Exchange, you may be taxed not only on any gain from the sale, but also on the depreciation recapture. Section 1031 of the Internal Revenue Code provides for the deferral of gain, provided certain requirements are met.

Things You Need to Know About 1031 Exchanges of Aircraft:

1. Both the old and new aircraft must be used for trade, business or investment. The old and new aircraft must both be used for trade, business or investment activities to qualify for a 1031 exchange. Personal use aircraft do not qualify.

2. The aircraft exchanged must be like kind. Aircraft are generally like kind to any other aircraft under the General Asset Classes or the Standard Industrial Classification (SIC) guidelines. In general, all aircraft and helicopters (except those used in commercial or contract carrying of passengers or freight) are treated as like kind. Commercial or charter aircraft and helicopters used for transporting passengers and cargo in scheduled air transportation, are similarly treated as like-kind to one another.

3. You have 45 days from the date of closing on the old aircraft to identify a list of aircraft from which you will purchase the new aircraft. From the date of closing, you have 180 days to close on one or more of the aircraft from your 45-day list.

4. You cannot have actual or constructive control of any of the proceeds received from the sale of the old aircraft. By law, all money is held by a Qualified Intermediary (also referred to as an Accommodator or Facilitator). You cannot have an associate or employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the new aircraft is purchased.

5. The titleholder on the old aircraft must be the same titleholder on the new aircraft. One aircraft can be exchanged for two or more replacement aircraft or vice versa.

6. The replacement aircraft must be equal or greater in value to the relinquished aircraft to avoid taxable boot, and all exchange cash must be reinvested in the replacement aircraft.

Aircraft owners can realize the benefits available through the 1031 Exchange process. A team of professional consultants is critical to ensure the necessary steps to complete your exchange properly are followed and comply with current Section 1031 tax law.

Selecting a knowledgeable and experienced Qualified Intermediary that is familiar with aircraft exchanges is of particular importance given the complexities of the exchange.