Personal Property

Tax Deferred Exchanges: A Vehicle Lessor Strategy For Maximized Operating Efficiency

You have done everything possible to minimize your operating costs. In fact, they have been managed down to a razor’s edge from purchasing, to maintenance of your fleet, to fuel costs and, ultimately, to how vehicles are sold. Is there anything more that can be done? If you own your vehicles, depreciate them for tax purposes, and sell them rather than trade them in, there is another advantage for you to gain — income tax deferral via “tax-deferred exchanges” rather than the existing practice of selling older vehicles and purchasing new ones.

Tax Deferred Exchanges

It happens all the time. A call comes in from a knowledgeable accountant: “We have a client who is replacing equipment and wants to defer paying taxes. We need some help with an IRC section 1031 exchange.” What’s being referred to here is a tax deferred exchange, which essentially gives taxpayers the right to transfer value from one business or investment property to another one of “like kind” without paying taxes on any gain in the process.

IRS Issues Long Awaited Reverse Exchange Rules

During the one-year period between the promulgation of the 1990 proposed exchange regulations and the issuance of the final regulations in April of 1991, the IRS solicited comments in regard to allowing pure reverse exchange transactions. A pure reverse exchange was understood to mean that the taxpayer would acquire the replacement property prior to the sale of the relinquished property. The final regulations ultimately failed to allow a safe harbor for such a reverse closing sequence.

Understanding the Impact of Depreciation on Like-Kind Exchanges

The U.S. Treasury does not lose cash revenue from an exchange because the taxpayer must forego future

Transport Topics: Eliminate Unnecessary Taxes

Due to the expiration of bonus depreciation, trucking companies are facing significant tax liabilities for 2014. This Transport Topic column offers strategies and solutions for mitigating the huge tax hit resulting from the sales of used equipment, tractors and trailers.

Limit Taxes on Sale of Rental Equipment Through 1031 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.

Internal Revenue Code Section 1031

Under Internal Revenue Code (IRC) section 1031, no gain or loss is recognized when companies sell business or investment property and acquire property that is like-kind. A transaction that is structured as a tax-deferred exchange is generally referred to as a "like-kind exchange" or an "LKE". Equipment dealers, car rental companies, and other organizations that routinely dispose of business assets can realize substantial benefits from an ongoing program of exchanges (referred to as an LKE Program).

Like-Kind Classification Codes

Depreciable tangible personal property is exchanged for property of a "like-kind" under section 1031 if the property is exchanged for property of a like-kind or like class. Depreciable tangible personal property is of a like class to other depreciable tangible personal property if the exchanged properties are either within the same General Asset Class or within the same Product Class. The attached document contains both the General Asset Class (GAC) and the North American Industry Classification System (NAICS) codes that are pertinent to tax-deferred personal property exchanges.

Rev. Proc. 2008-16: Exchanges of Vacation Homes and Rental Property

This revenue procedure provides a safe harbor under which the Internal Revenue Service (the “Service”) will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment for purposes of § 1031 of the Internal Revenue Code.

Rev. Proc. 2000-37: Reverse Exchanges

Since the promulgation of the final regulations under § 1.1031(k)-1, taxpayers have engaged in a wide variety of transactions, including “parking” transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to “park” the desired replacement property with an accommodation party until such time as the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property, and the accommodation party then transfers the relinquished property to the ultimate transferee.

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