Anybody here use a 1031 when stepping up in aircraft?

azblackbird

azblackbird

Pattern Altitude
Joined
Mar 24, 2017
Messages
1,550
Location
Colorado Boonies
Display Name
azblackbird
Just wondering if there's any 1031 buyer/sellers here, and what if any complications you may have encountered when engaging in those transactions? Mainly interested in what the boot rules are?
 
Only times I've ever done 1031 exchanges was to defer capital gains taxes. Since making a profit on an airplane sale tends to be the exception rather than the norm, I think you'll find few examples.
 
This makes perfect sense. Everybody needs to trade in their plane for a profit after wearing it out in a 1500 mile cross country during their training.
 
Salty said:
This makes perfect sense. Everybody needs to trade in their plane for a profit after wearing it out in a 1500 mile cross country during their training.
Click to expand...
@Salty this is probably way above your pay grade, but I'll try to simplify it for you. There are many instances where the depreciation recapture on business aircraft can often be more than the original cost basis. In those cases you'll end paying a tax on the recapture value when you go to sell it. I'm sure you've heard the many stories of how somebody bought a nice plane, flew it for few years, and then sold it for basically what they paid for it. If it was a business aircraft and was depreciated out, then the only option available to the owner is to either sell it and eat the taxes, or they can do a 1031 exchange and roll it over into a nicer/newer airplane and defer those taxes.
 
azblackbird said:
@Salty this is probably way above your pay grade, but I'll try to simplify it for you. There are many instances where the depreciation recapture on business aircraft can often be more than the original cost basis. In those cases you'll end paying a tax on the recapture value when you go to sell it. I'm sure you've heard the many stories of how somebody bought a nice plane, flew it for few years, and then sold it for basically what they paid for it. If it was a business aircraft and was depreciated out, then the only option available to the owner is to either sell it and eat the taxes, or they can do a 1031 exchange and roll it over into a nicer/newer airplane and defer those taxes.
Click to expand...
Apparently actually taking a lesson is above your paygrade, so I'd say I'm doing just fine.
 
Wouldn't it just fall under section 179 bonus depreciation instead of a 1031 exchange?

I say that because most of the time, unlike real estate, the new plane is going to have a purchase price higher than the old plane.
 
midcap said:
Wouldn't it just fall under section 179 bonus depreciation instead of a 1031 exchange?
Click to expand...
You can take the 179 or go straight line on your depreciation. Once you've depreciated the airplane out over a 5-6 year period and are ready to sell, then your taxed heavily on the recapture portion, especially if the airplane didn't actually depreciate in value. To avoid those taxes, you can do a 1031 like kind exchange and roll them over into a newer more expensive airplane.
 
azblackbird said:
You can take the 179 or go straight line on your depreciation. Once you've depreciated the airplane out over a 5-6 year period and are ready to sell, then your taxed heavily on the recapture portion, especially if the airplane didn't actually depreciate in value. To avoid those taxes, you can do a 1031 like kind exchange and roll them over into a newer more expensive airplane.
Click to expand...

I don't see the 1031 being worth the extra paper work if you are going to use 179 again on the new plane if it is more than what the old plane sold for. Now, if the new plane is less money than the old plane sells for, I think that's where the 1031 comes into play.
 
midcap said:
I don't see the 1031 being worth the extra paper work if you are going to use 179 again on the new plane if it is more than what the old plane sold for.
Click to expand...
Yes, on the new plane you'd use either 179 or straight line and start the process all over again. Once that plane is depreciated out and if it retained it's value over that time period, rather than getting hit with a tax bill on the recapture portion, you do a 1031 and roll those taxes over into the purchase of new plane. It's a great system if you are constantly stepping up to more complex or newer type planes and hate paying taxes.
 
What is your question? Whether there would be boot in the transaction? I have advised on a number of like kind exchange transactions (including aircraft) and whether it is "like kind property" is generally the sticking point. Plenty of escrow companies will hold the cash you receive on the old plane for 6 months if you want to do a deferred exchange. Boot is specific to the transaction.
 
Boot would be taxable to the extent of realized gain. If the amount of debt on the replacement property is less than the debt on the relinquished property, that could create boot. These calculations are all fairly mechanical - the tough part is the like kind classification analysis.

I'm not sure why you would go out of your way to structure something as a like kind exchange if the value of the new property is less. Why not expense under 179 or take bonus depreciation if you're buying a new plane?
 
aggie06 said:
I'm not sure why you would go out of your way to structure something as a like kind exchange if the value of the new property is less. Why not expense under 179 or take bonus depreciation if you're buying a new plane?
Click to expand...
The current plane would already be depreciated out, thus the reason for a 1031. Was just wondering in the case of a trade down how the boot would would be treated. As you stated if there is a realized gain, then it would be taxable. Thus the smart thing to do would be to trade up to something of equal or higher value that would negate any boot on the previously depreciated plane. The new re-furbed plane would be expensed under 179.
 
You don't get new basis to depreciate in such an exchange. You only get the remaining basis from the old plus anything additional you spent. That's why it doesn't seem to make sense in your hypothetical.

Suggest a decent CPA and actual facts on this one.
 
aggie06 said:
You don't get new basis to depreciate in such an exchange. You only get the remaining basis from the old plus anything additional you spent.
Click to expand...
I think we're basically saying the same thing. I did a little more research on the matter and found out what I needed. Thanks for your input.;)
 
You must log in or register to reply here.
Back
Top