What is a Reverse Exchange and What Causes it to Fail?A conventional IRC §1031 tax deferred exchange involves, among other things, a taxpayer’s sale of old property (the “relinquished property”) followed by the purchase of new property (the “replacement property”) within a 180 day period (see http://www.accruit.com/1031-news/%C2%ADare-tax-deferred-exchanges-real-estate-approved-irs ). A so-called reverse exchange takes place when the taxpayer is forced to acquire the replacement property, or face losing it, prior to the sale of the relinquished property. The sequence of the disposition and acquisition is “reverse” from the conventional transaction.
On August 1, 2014, we received a call from the exchange department of a national banking association. She had a client for whom she was facilitating a conventional exchange of real estate.
We were contacted by a potential client about doing an Internal Revenue Code (IRC) §1031 tax deferred exchange. The client needed to acquire, or risk losing, the desired replacement property (new property) in Dillon, Colorado. However, the contract with his buyer for the sale of his relinquished property (old property) in Littleton, Colorado was not scheduled to close until November 28, 2014, a month after the date of closing for the new property. The purchase price for the new property was $562,000.
On May 7, 2014, an attorney from central Illinois contacted us on behalf of his client, Mr. Lodo, who wished to do an Internal Revenue Code ("IRC") §1031 exchange. Mr. Lodo needed to acquire, or risk losing, his desired replacement property, however, he did not have a buyer in place for the sale of his relinquished property.
A qualified intermediary (QI) company received an inquiry from some taxpayers, who we will call Mr. and Mrs. Pike, regarding facilitating a real estate exchange. The QI, a personal property specialist, was kind enough to refer the matter to North Star Deferred Exchange, which is the Accruit-owned company that specializes in real estate exchanges. The clients got in touch with North Star on July 14, 2014.
Rental equipment qualifies for this useful tax solution and should be considered a viable choice for your business
At 39.1 percent, the U.S. corporate income tax rate (average combined federal and state) is the highest in the industrialized world. Most of us want to find ways to (legally) limit our taxes. For equipment lessors, one of the best and most commonly overlooked ways to limit/defer taxes is to “exchange” (rather than sell outright) old or obsolete equipment.
Many people have been led to believe 1031 exchanges are available only on real estate, but this is not true. “Personal property” (rental equipment) 1031 exchanges have been available since at least 1935.
In 2009 JBEC decided to move several older cranes and to purchase a new model from a local dealership. The existing cranes were fully depreciated for tax purposes, and the company anticipated a hefty tax bill upon sale.
The Accruit Solution
JBEC, which had conducted several single exchanges in the past, consulted with its Accruit Client Service Manager and learned that its plans represented a very simple straightforward 1031 exchange. The CSM helped them structure the exchange, at which time they sold the relinquished assets (four Grove RT series and one Grove TMS series) at a Ritchie Bros. auction.
Hartson faced a complex exchange scenario. The company planned to purchase multiple strings of tubing and casing over a period of several months and they intended to sell scrap tubing and casing sometime between the first set of purchases and the last. The exchanged equipment was to be carved out of a much larger sale and about 25% of the equipment sold wasn't going to be replaced. The replacement property was to be purchased and aggregated in four states: North Dakota, Oklahoma, Pennsylvania and Texas, with the majority of the replacement property to be parked in Texas and Oklahoma, where the bulk of the deferral was to be concentrated.
American Value Automotive* (AVA) is a large licensee serving the western United States. Their portfolio includes light trucks and automobiles (cars comprise roughly 95% of their assets).
AVA sells 3,000 vehicles per year, generating $72MM in revenue. The assets have a five-year MACRS life, but the average hold time is just six months. The company’s combined state and federal tax rate is approximately 40%.
Oil & Gas: 1031 exchange program generates massive cash flow and asset management benefit for energy industry giant IconX
IconX had historically employed 1031 like-kind exchanges (LKEs) for real estate and leasehold transactions, but several years ago company executives learned that LKEs could also be used for non-real estate assets - vehicles, production/drilling equipment, even certain types of intangible assets (like mineral rights).