Tax-Free Exchanges of Aircraft Under Section 1031

Overview
Under Section 1031
© 1999 KEITH G. SWIRSKY

Hereafter, the old property disposed of in a like-kind exchange will be referred to as "relinquished property" and the new property acquired in a like-kind exchange will be referred to as "replacement property." The person (e.g., corporation, trust, partnership or individual) engaging in the exchange transaction shall be referred to as the "taxpayer".The Internal Revenue Code ("IRC") provides a special exception to the general taxation of sales of property. Under IRC § 1031 (all § references herein are to the IRC), business property may be exchanged tax-free for other business property if both properties are of "like-kind." The rationale for this rule is that, when a business exchanges old property for new property of the same kind, the investment in the new property is somehow a continuation of the owner's investment in the old property. While this transaction is referred to as tax-free, it would be more accurate to call it tax-deferred. Taxable income from a like-kind exchange is effectively postponed until the new property received in the exchange is subsequently disposed of in a taxable transaction. If the new property is itself exchanged later for a third piece of like-kind property, the income may be postponed continually. On the other hand, if a like-kind exchange is not executed, a taxable event occurs and the tax basis of the property received is increased by any gain that is recognized, up to its fair market value. The like-kind exchange is therefore a powerful tax-planning device, but one that requires careful attention to many specific and technical requirements.

Hereafter, the old property disposed of in a like-kind exchange will be referred to as "relinquished property" and the new property acquired in a like-kind exchange will be referred to as "replacement property." The person (e.g., corporation, trust, partnership or individual) engaging in the exchange transaction shall be referred to as the "taxpayer".