Why Like-Kind Exchanges Matter
For owners of equipment, like-kind exchanges are focused on the deferral of income tax related to their dispositions, and the benefits of a like-kind exchange require adherence to a strict set of rules. Properly structured like-kind exchanges present a powerful proposition – allowing asset owners to keep cash that would normally be lost to federal and state taxing authorities in their businesses.
What Are the Types of Like-Kind Exchanges?
With the help of an experienced qualified intermediary, the proper like-kind exchange structure can safely be found. Those structures include the following:
▶ Simultaneous exchanges
▶ Delayed/forward exchanges
▶ Reverse exchange
▶ Program exchanges
Simultaneous exchanges require the ownership transfers to occur at the same time, with care taken to account for the equipment’s respective values. Furthermore, since the equipment doesn’t usually share the same fair market value, cash or other equipment used as part of the purchase/sale price must be carefully delivered directly to the other party.
Simultaneous like-kind exchanges can be a great way to keep an LKE simple and cost-effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller and/or buyer. It’s these variables that require careful planning.
Delayed/forward exchanges allow asset owners more time to search for and acquire their replacement equipment. In this format, the sale of the relinquished equipment occurs first, with the acquisition of any replacements to be completed within the earlier of 180 days of the sale or the tax filing due date (which may be extended). Just like simultaneous exchanges, careful planning will help asset owners conduct the transaction within the Internal Revenue Service’s strict requirements.
In cases where the replacement equipment must be acquired prior to the sale of the old equipment, reverse exchanges are an option for asset owners seeking Section 1031’s benefits. Reverse exchanges are unique in their planning considerations, and it’s critical that equipment owners, prior to any purchases, begin the planning process with a qualified intermediary and an experienced tax advisor. Any outright purchases, before proper planning, are often fatal to the exchange.
Program exchanges allow owners of large fleets of equipment to award like-kind exchange treatment to their asset management process. These exchanges are particularly powerful and somewhat complex, awarding millions of dollars of tax deferral benefits to the fleet owner’s disposition and acquisition process.
Get Started with Like-Kind Exchanges
Regardless of the structure, all like-kind exchanges require thoughtful planning – planning that begins with an experienced qualified intermediary and a tax advisor. By law, like-kind exchanges are a deadline- and document-driven process. Generally speaking, if an equipment owner has sold or purchased equipment without the correct exchange documents in place or without the use of a qualified intermediary, it is likely too late to obtain LKE treatment.
The importance of early planning cannot be stressed enough. Equipment owners curious about like-kind exchanges should contact a qualified intermediary and their tax advisor right away.