1031-Exchange-of-the-MonthOver the years we have handled 1031s of everything from espresso machines to Emus but here’s a 1031 we had not thought of doing until this month; an industrial laser! The industrial machine shop that was relinquishing an amazing piece of equipment was going to realize a tremendous tax hit upon a sale. Since they were replacing the laser with a new one, section 1031 was the perfect solution.

You may be asking how the disposition of a used piece of equipment could trigger gain… Remember gain has nothing to do with profit; it is simply the difference between the adjusted sales price and the basis. Equipment like the laser has a very short depreciation schedule and therefore a gain can be realized on certain items in a very short period of time, sometimes even a number of days!

Well, the exchange was structured and a replacement is in the works!

What Do You Mean I Have Gain?

During the past several years we have had the above question asked too many times to remember. The bottom line is that gain has absolutely nothing to do with profit of sales proceeds, it is simply the difference between the adjusted sales price and the basis of the item being relinquished.

So what is the basis? In a nutshell it’s the purchase price plus any capital improvements minus depreciation. Sounds pretty easy to calculate right? Well, consider the “purchase price” can be effected by the manor the property is acquired; was it a new purchase, inherited, gifted or exchanged?

Now consider the improvements, were they capitalized or expensed? Capitalized improvements will increase the basis while expensed items are merely written off.

How about the depreciation, was it taken? How was it taken? Should it have been taken? How where allocations made? Think about the potential impact on return that depreciation can have. Next month we will discuss the topic of depreciation further…

The bottom line is that our personal property transaction usually are driven by depreciation recapture though in some rare instances we have increased value triggering the gain. Many of today’s real estate 1031s are also a result of depreciation triggered gain.

Depreciation and debt over basis triggered “phantom” gain can bite the uninformed, it is critical that sellers consult their tax counsel before relinquishing items of value. A simple 1031 Exchange can save investors and business owners a fortune so please call us today to find out more.