Aircraft as a 1031 Exchange
While the 1031 Exchange is most commonly used for real estate transactions, other depreciable assets such as aircraft may qualify for exchange as well. A 1031 Exchange can have tremendous benefits to an aircraft owner when replacing their aircraft.
COMPARING A SALE TO AN EXCHANGE
A business owner owns a 1978 Cessna Citation 550 and plans to sell it to purchase a 2000 Cessna Citation Excel. The following example shows the difference between if the owner were to exchange the planes, or just right out sell:
|Original Purchase Price of Cessna:||$2,000,000|
|Improvements made during ownership||$500,000|
|Basis for Depreciation||$2,500,000|
|Basis after 7 years of Depreciation||$0|
|Without 1031 Exchange||With 1031 Exchange|
|Taxable gain recognized||$1,000,000||$0|
|Tax (35%) due to depreciation recapture||$350,000||$0|
|Cash available for purchasing aircraft||$650,000||$1,000,000|
As the above table shows, if the business owner were to sell the Cessna Citation 550 without setting up an exchange, he will owe $350,000 in tax due to depreciation recapture. This leaves him with only $650,000 to reinvest into a new plane. If he were to set up an exchange, he would defer the depreciation recapture payment to another date, owe $0, and have the full sales price of$1,000,000 to reinvest into the new plane.
Property held for productive use in a trade, business or for investment may be exchanged for like-kind property. An aircraft exchange falls under personal property. Personal property is evaluated based upon its nature and character, its General Asset Class, and NAICS classification.
Aircraft and aircraft equipment fall under Depreciable tangible personal property. In order for the aircraft properties to be considered like kind they must be like-class. The classes are established in tax regulations as General Asset Class and Product Class. If the property may be classified within a General Asset Class, then it may not be re-classified into a Product Class.
Within the General Asset class, the following aircraft/aircraft equipment qualifies: Airplanes (airframes and engines) except those used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines) (asset class .21)
TYPES OF EXCHANGE
The delayed exchange is common and straightforward: the Exchangor relinquishes (sells) aircraft property before he acquires the new aircraft property. A delayed exchange usually starts at $750.
The Reverse Exchange allows an Investor to acquire an aircraft today, when an excellent investment may be available and sell the other aircraft later when a better price might be obtained. A reverse exchange usually starts at $3500 and goes up from there, depending on the circumstance.