Aviation
Articles
Tax-Free
Exchanges of Aircraft Under Section 1031
Multi-Asset Exchanges
Under Section 1031
© 1999 KEITH G. SWIRSKY
A.
Basis Issues in Multi-Asset Exchanges
As mentioned above, one who engages in a like-kind exchange
generally recognizes no income on the disposition of
one's relinquished property; instead that income becomes
taxable if and when the replacement property is disposed
of in a taxable transaction. This deferral of income
is accomplished by assigning one's "basis" in the relinquished
property to the replacement property. Such deferral,
however, is not accomplished without a price. The taxpayer
will obtain a reduced basis in the replacement aircraft
which will reduce depreciation deductions while the
replacement aircraft is owned by the taxpayer.
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The computation of basis is also important in exchanges
involving boot, because one may be liable for tax to
the extent of gain realized, which is the difference
between the basis in the relinquished property and the
amount of property received in the transaction. When
a transaction involves more than one relinquished property
or more than one replacement property, however, the
determination of basis in the replacement property is
somewhat more complicated.
In the case of an exchange of multiple properties, the
Regulations generally require a property-by-property
comparison for computing the gain realized and basis
of replacement property received in a like-kind exchange.
However, if the various relinquished properties transferred
by a taxpayer in an exchange can be assigned to two
or more "Exchange Groups," gain and basis may be determined
on an Exchange Group-by-Exchange Group basis. For these
purposes, an Exchange Group consists of all relinquished
and replacement properties in one exchange which are
of like kind. All properties of like kind or like class
must be grouped together in the same Exchange Group.
In other words, all properties within the same General
Business Asset Class and within the same four-digit
Product Code, respectively, would be in the same Exchange
Group.
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No gain will be recognized if the aggregate value of
the relinquished properties in each Exchange Group transferred
equals the aggregate value of the replacement properties
in the same Exchange Group. Within one Exchange Group,
if the aggregate fair market value of the replacement
property exceeds the aggregate fair market value of
the relinquished property, the excess is allocated to
other Exchange Groups. Such excess value allocated is
treated as "other property or money" received in the
exchange, i.e., boot, and is therefore taxable.
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