How do I utilize a 1031 Exchange to avoid recapture tax?

1031 exchange to avoid recaptureAssume an airplane owner has owned his airplane for 6 years and over that time has fully depreciated the plane and enjoyed the tax savings over those years. He’d like to sell his airplane, but knows that if he sells it he’ll need to pay back the tax on the proceeds that he receives from the sale. How might his tax situation look if he used the proceeds from the sale for another plane in a 1031 exchange?

As you can see in the comparison below, the investor who exchanges can obtain considerably higher investment returns from deferring the payment of capital gain taxes. The current low rates for financing provide a unique opportunity for new plane purchasers to lock-in excellent loan terms. Sellers should explore the possibility of exchanging before closing on the sale of their airplane.

SALE (CASH OUT) and repurchase1031 EXCHANGE (REINVEST)
Cessna 182 Sale200000$200,000 to reinvest
Taxes Owed95000$0 (no taxes owed in the current tax year)
Net Income to Invest$105,000 (proceeds less taxes owed) $200,000 (entire amount of proceeds received)
Time RestrictionsNoneYes, 45 days to identify replacement property
Maximum of 180 days to close on replacement property
Replacement Asset BasisBasis equals purchase priceOnly partial basis for new depreciation
Basis equals purchase price minus deferred gain

It is applicable whenever an airplane owner intends to SELL a business airplane and plans to BUY another “like-kind” property (business airplane) within 180 calendar days following the closing of the relinquished airplane.

Critical to any exchange is a competent and experienced Qualified Intermediary. (You cannot “touch” the proceeds of your sold airplane directly nor can a related party such as your CPA, attorney, aircraft dealer, etc.)

A Qualified Intermediary (“QI”) is a person who enters into a written agreement with the taxpayer (the “Exchange Agreement”) under which the QI:

• Acquires the relinquished property from the taxpayer;
• Transfers the relinquished property;
• Acquires the replacement property;
• Transfers the replacement property to the taxpayer.
The 1031 exchange is employed by most aircraft owners when they move up to newer equipment, is not terribly complicated, but must be done correctly. Talk to your tax planner before selling your plane to determine if you can benefit from this tax provision.





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