Forward Exchanges

At 39.1 percent, the U.S. corporate income tax rate (average combined federal and state) is the highest in the industrialized world. Most of us want to find ways to (legally) limit our taxes. For equipment lessors, one of the best and most commonly overlooked ways to limit/defer taxes is to “exchange” (rather than sell outright) old or obsolete equipment.

Tax-deferred exchanges of real estate have been recognized by the Internal Revenue Code since the 1920s. Recently, various factors have converged leading to a marked increase in the use of tax-deferred exchanges as an alternative to outright real property sales. Two of the principal factors resulting in the current popularity of tax-deferred exchanges are the increase in the maximum capital gain rate and the practical implications of the legal decision in Starker v. United States. Although simultaneous exchanges had been employed for a long time, the landmark Starker case opened a window of opportunity for valid exchanges on a nonsimultaneous basis.