1031 Exchange LKE Program Exchange Strategies
The disposition or sale of any personal property such as aircraft and aircraft equipment and parts, aircraft landing rights, shipping vessels or boats, fleets of autos or trucks, computer systems and equipment, manufacturing equipment, plant equipment, office equipment, or other personal property that is owned by and used in a trade or business can result in undesirable income tax consequences for a business operation.
Income Tax Consequences
A disposition or sale of personal property can generate capital gains and/or depreciation recapture income taxes. Capital gains result from the appreciation of the personal property above its original cost basis. Depreciation recapture results from the writing off or depreciation of the personal property's original cost basis to an adjusted cost basis that is less than the fair market value of the personal property.
The capital gain and depreciation recapture income taxes would be recognized by the business operation under an outright disposition or sale of the personal property.
Deferring Payment of Income Taxes
Business operations can defer the payment of capital gain and/or depreciation recapture income tax liabilities on the disposition or sale of personal property (relinquished property) when exchanged or traded for other like-kind or like-class personal property (like-kind replacement property) pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Department of the Treasury Regulations.
The deferral of the income tax consequences allows the business operation to keep the working capital (cash) invested in the business operation instead of paying federal, and in most cases, state income taxes.
1031 Exchange LKE Program Exchanges
1031 tax deferred exchange transactions involving significant quantities of personal property, such as fleets of rental cars or railroad rolling stock have become known as LKE Program Exchanges and are addressed in Department of the Treasury Revenue Procedure 2003-39.
LKE Program Exchange Strategies are complex income tax transactions that always involve multiple assets, multiple 1031 tax deferred exchange transactions with significant LKE Program Exchange documentation pursuant to a master LKE Program Exchange Structure.
Calculating and managing the personal property's deferred capital gain, depreciation recapture and new cost basis after completing the LKE Program Exchange can be challenging. The Code, Regulations and related rulings for LKE Program Exchanges are very detailed and complicated.
Exeter 1031 Exchange Services, LLC along with the the business operation's legal and income tax advisors can design, structure and implement a successful LKE Program Exchange Strategy.
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