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- What is a 1031 Like-Kind Exchange?
- Are 1031 Like-Kind Exchanges approved by the IRS?
- How common are 1031 Like Kind Exchanges?
- What are the requirements for a valid 1031 Like-Kind Exchange?
- What are the benefits of a 1031 Like-Kind Exchange?
- What assets qualify for a Like-Kind Exchange?
- What is 'personal property'?
- How much time do I have to complete my Like-Kind Exchange?
- When can I take money out of the exchange account?
- Is my contract with Ritchie Bros affected by my decision to put my assets in a Like-Kind Exchange program?
- Do I need to sign up for a Like-Kind Exchange program before my asset(s) are sold?
- What is a Qualified Intermediary (QI)?
- What is safe harbor?
- What is constructive receipt?
- Is my company's money safe with Accruit?
- How does Accruit receive and send funds?
- Is Accruit's process secure?
- Is Accruit different than a tax advisor or accountant?
What is a 1031 Like-Kind Exchange?
A 1031 Like-Kind Exchange, also known as an LKE, Like-Kind Exchange, 1031 Exchange,
a Starker Exchange or Swap, is a tax deferral strategy for the gain on the sale and purchase of
similar property (ex. cars for cars or construction equipment for construction equipment).
A Like-Kind Exchange enables business owners a way to replace their property
with similar property without recognizing a gain, thereby deferring Federal
income tax (roughly 35-40% of realized gain). Like-Kind Exchanges are governed
by Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury
Regulations and have been part of our tax code since 1921.
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Are 1031 Like-Kind Exchanges approved by the IRS?
Yes. Like-Kind Exchanges were first enacted in 1921. In recent decades,
various decisions and rulings have reinforced the validity of Like-Kind Exchanges
and extended their application to deferred exchanges (§ 1031).
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How common are 1031 Like-Kind Exchanges?
Like-Kind Exchanges occur everyday. Although personal property exchanges had
been less common than real estate exchanges, the advance of technology has greatly
increased the number of personal property exchanges conducted annually, and now
allows for even the smallest personal property assets to benefit from a Like-Kind Exchange.
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What are the requirements for a valid Like-Kind Exchange?
- A business owner must have qualifying property.
Qualifying property is any asset held for investment or used in the business not specifically
excluded by Section 1031. (i.e. inventory)
- Both sold and replacement property must be held for
productive use in the business or for investment. This is commonly known as
proper purpose.
- Sold and replacement property must be of like kind
as defined by its depreciation classification. Some of these groups include
heavy equipment, automobiles, over-the-road tractors, trailers, mining equipment,
aircraft and so on. Assets classified in a certain group may be replaced in
an LKE with assets similarly classified. For example, a scraper replaces a
backhoe, a refrigerated trailer for a straight trailer, or even a group of
attachments for a wheel loader. Sold property and replacement property need
not be in the same condition. For example, you may sell a newer asset and
buy multiple older assets. Conversely, you may sell several old assets and
buy one new asset as long as they are of similar type or like kind.
- To meet the exchange requirement, sold property
must be replaced with other property. Receiving cash for a particular sale and
using the proceeds to buy the replacement property automatically disqualifies
the transaction. A Qualified
Intermediary must manage the funds in a Like-Kind Exchange transaction and
helps you (the taxpayer) ensure all exchange requirements are met.
- Timing is essential for a qualified Like-Kind
Exchange. You have up to the earlier of 180 days after sale date of your
original property or the filing date of your taxes to purchase replacement
property.
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What are the benefits of a 1031 Like-Kind Exchange?
A 1031 Like-Kind Exchange is one technique available to postpone or permanently
defer Federal income taxes (roughly 35 - 40%) due on the gain from the sale of
qualifying properties.
- By deferring taxes, you have more cash available to invest
in other property (assets). In effect, you receive an interest free loan from
the federal government in the amount you would have paid in taxes.
- Any gain from depreciation recapture is postponed.
- You can acquire and dispose of assets to reallocate your investment
portfolio without paying tax on any gain.
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What assets qualify for a Like-Kind Exchange?
Personal property or real estate assets held for investment or used in your place of
business may qualify for a Like-Kind Exchange. Personal property refers to any asset that
is not classified as real estate. Off-lease assets may also qualify for a Like-Kind
Exchange program. Assets must be of a similar type but need not be of the same
quality or age.
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What is 'personal property'?
Any asset used and depreciated in your business that is not land or buildings is personal
property. Personal property includes, but is not limited, to heavy equipment, cars, SUVs,
trucks, tractors, trailers, cranes, railcars, ships, barges, computers, or any other asset
used in your business. Real property includes residential or commercial buildings,
land or other real property.
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How much time do I have to complete my LKE?
You (the taxpayer) have up to the earlier of 180 days after sale date of your
original property or the filing date of your taxes to purchase replacement
property.
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When can I take money out of the exchange account?
Once money is deposited into an exchange account, funds may only be withdrawn in
accordance with the Internal Revenue Code regulations governing 1031 Like-Kind Exchanges.
You (the taxpayer) cannot receive any money until the Like-Kind Exchange is complete.
If you were to receive any of the money prior to completion of the Like-Kind Exchange,
then you would be in constructive receipt and the exchange will be disallowed.
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Is my contract with Ritchie Bros affected by my decision
to put my assets in a Like-Kind Exchange program?
No, your contract with Ritchie Bros. does not change. You will be required to execute
an agreement with Accruit for the purpose of putting your assets in a Like-Kind Exchange
program and you will notify Ritchie Bros. that you are doing a Like-Kind Exchange.
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Do I need to sign up for a Like-Kind Exchange program before
my asset(s) are sold?
Yes, an Exchange Agreement with Accruit must be signed prior to asset disposal.
In addition, pursuant to the safe harbor statutes of Section 1031 of the
Internal Revenue Code, you must notify buyers of your Like-Kind Exchange program prior to sale.
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What is a Qualified Intermediary (QI)?
A Qualified Intermediary or QI
is the entity that helps you complete the 1031 Like-Kind Exchange. A QI the facilitates
the Like-Kind Exchange and manages the process of a safe-harbor deferred exchange. Pursuant to
Section 1031 of the Internal Revenue Code, the QI cannot be the taxpayer or a disqualified
person (i.e. an agent, tax preparer, attorney or accountant of the taxpayer).
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What is 'safe harbor'?
Safe harbor refers to adhering to the guidelines set forth in the Internal Revenue Code
regulations. Safe harbor provides security to you (the taxpayer) that by following the
accepted rules you (the taxpayer) are staying in compliance with the purpose, intent and
structure of the tax code.
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What is constructive receipt?
Constructive receipt occurs when the taxpayer has the ability to receive, pledge, borrow
or obtain the benefit of exchange funds. You cannot have money (or property) from the
exchange credited directly to your bank account or have direct access to the proceeds.
Being in constructive receipt of exchange funds (or property) results in the
disallowance of the Like-Kind Exchange, meaning you (the taxpayer) would have to pay taxes
on any gain from the sale of your property.
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Is my company's money safe with Accruit?
Exchange funds sent to Accruit are deposited directly to escrow accounts held with leading
financial institutions. Accruit maintains a significant bond and Errors and Omissions insurance.
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How does Accruit receive and send funds?
Accruit currently receives and sends funds via secure bank-to-bank wire transfers or
checks. Our preferred option is wires, which minimize the physical handling of client
funds and increase overall security. Accruit will consider other methods of funds
handling (e.g. ACH) upon request.
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Is Accruit's process secure?
Accruit takes security seriously. Accruit conducts regular security audits and in-depth
system reviews to ensure that our system provides the highest security and reliability.
Physical security of the system is provided at secure co-location facilities. These
facilities are built upon a carrier-independent infrastructure that ensures built-in
redundancy and fail-over solutions, providing multiple layers of physical security,
redundant power supplies, highly scalable networks, and back-up systems.
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Is Accruit different than a tax advisor or accountant?
Accruit is neither a tax advisor nor an accounting service. Consult your tax
advisor or accountant for questions concerning your specific situation.
Accruit does not provide legal services. Consult your attorney if you have concerns
regarding specific legal issues. |
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