Many people that own airplanes get dissatisfied with their old airplanes and want to exchange for something new and better. In this article, we will talk about the benefits of doing a 1031 exchange and deferring all the gain on the sale of your aircraft.
1031 Exchanges of Airplanes
The thing about airplanes is that they can be depreciated for tax purposes much more rapidly than real estate. So an airplane might be depreciated over a seven year straight line schedule, which means after three or four years you’ve whittled down your basis considerably. In that case, if you were to just sell that airplane outright you'd recognize a ton of gains on the sale of that old airplane.
So rather than sell that plane to a third party in a taxable transaction, you can schedule it as a 1031 exchange and have your intermediary dispose of the old aircraft. Then the intermediary can use your proceeds to go out and buy your new aircraft (your replacement plane). By doing it through the intermediary you can defer all of that gain on the old aircraft and roll up into a new bigger better plane.
Most all aircraft in the USA are classified in asset class 00.21, except those used in commercial or contract carrying of passengers or freight. *See Footnote 1
1031 Practice Tip
Aircraft used predominantly within the United States and aircraft used predominantly outside the United States are NOT property of a like kind. Code Section 1031(h) states that you have to test the predominant use of any property based on:
- in the case of the property relinquished in the exchange, the 2-year period ending on the date of such relinquishment, and
- in the case of the property acquired in the exchange, the 2-year period beginning on the date of such acquisition.
There is an exception for certain aircraft used outside United States listed in IRC Section 168(g)(4) for “any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States.”
Keep in mind the critical deadlines for a 1031 aircraft exchange. You have to identify in writing the new replacement aircraft within 45 days of the sale or closing of the old relinquished aircraft. After that, you have 180 days total to complete the purchase of the new aircraft. Both of those clocks run concurrently from the day after the closing of the sale of the old relinquished aircraft.
- 1031 Hotline: If you have questions about 1031 aircraft exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Copyright Jeffrey R. Peterson All Rights Reserved
Footnote 1: Section 1.1031(a)-2(a) provides that personal properties of a like class are to be considered of like kind for purposes of section 1031. Under §1.1031(a)-2(b), 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 general asset classes are derived from Rev. Proc. 87-56, 1987-2 C.B. 674, (dealing with depreciation of personal property). Section 1.1031(a)-2(b)(2) adopts certain of those general asset classes to determine what property is of like kind for purposes of exchanging depreciable tangible personal property under section 1031, and identifies the types of personal property included in each general asset class listed.