PCCA Journal 3rd Quarter 2014 - page 10

PCCA Journal|3
Quarter 2014
Like-Kind Exchanges
Continued from page 9
doesn’t have to be simultaneous. Owners now have 45 days
to identify new equipment and 180 days from the date of
transfer of the old equipment to complete the exchange.
In simple terms, owners are taxpayers who negotiate the
terms of the related sale of old equipment and acquisition
of new equipment. Their “qualified intermediary” facilitates
transactions and helps qualify them as an exchange under
the technical provisions of the regulations. The current regu-
lations make it imperative that owners select an experienced
In IRC Section 1031 regulations, the “qualified intermedi-
ary” and “qualified escrow” safe harbors are the recom-
mended means of structuring deferred exchanges that when
properly completed will not be challenged by the IRS as to
With the use of a qualified intermediary, the transaction
is facilitated by the intermediary, standing in place of the
buyer and consummating an exchange with the taxpayer.
In addition, using a qualified escrow provides a secure and
permitted source of holding the funds during the exchange
period. The funds are effectively removed from the buyer’s
possession or control while protecting against the taxpayer’s
actual or constructive receipt. Under provisions of a third
safe harbor, interest on the exchange deposit is payable to the
taxpayer upon conclusion of the exchange.
Under the regulations, in order for an intermediary to con-
summate an exchange with a taxpayer, one of three events
must take place: 1) the intermediary must come into title to
the relinquished and replacement properties; 2) the interme-
diary must enter into contracts for the acquisition and trans-
fer of the relinquished and replacement properties; or 3) the
intermediary must take an assignment for existing contracts
providing for the acquisition and transfer of those properties.
In practice, it is usually easiest to take an assignment of
the contracts. In that case, it is critical for the taxpayer to
provide written notice to all parties, including co-sellers or
co-buyers, that the assignment is taking place. Notwithstand-
ing the assignment of certain rights and obligations of the
taxpayer to the intermediary, the regulations allow direct
transfer of property between the taxpayer and the relin-
quished property buyer and the replacement property seller.
The regulations allow 45 days from the date of transfer of
the relinquished property in which to identify replacement
property. The identification must be in writing and signed
by the taxpayer. If all replacement property will actually be
received within the 45 day period, then no written identifica-
tion is needed.
Generally speaking, taxpayers can identify up to three
properties, without regard to market value. If they intend to
purchase or identify more than three properties, they must
consider additional rules, known as the 200 percent rule and
the 95 percent rule. The taxpayer has 180 days from the date
of transfer, or less (based on the due date for filing taxes) in
which to actually acquire one or more of the replacement
properties identified.
A Boon to Equipment Owners
More than ever, like-kind exchanges are a valuable tool for
sellers of equipment and include the following benefits:
• Taxes payable this year are decreased,
• Cash flow is increased,
• All value is transferred from the old property to the new,
• Time value on an owner’s cash is improved, and
• Borrowing needs are decreased.
Structuring like-kind exchanges is made easier by relying
on the expertise and reliability of an experienced interme-
diary. Qualified intermediaries have developed the basic
documents and have the expertise to make structuring an
exchange a turnkey process, leaving a minimum amount
of work for owners and their advisors to take advantage of
exchanging like-kind equipment. Working with an owner’s
tax and legal advisors, an intermediary can help you take
advantage of this important opportunity and, ultimately, help
make your operations more profitable.
Portions reprinted from Equipment Leasing Today, February
1996. Edited slightly for clarity and updated for relevance.
Martin S. Edwards is currently general counsel, Accruit, LLC,
and president, North Star Deferred Exchange LLC. Steve
Chacon, CPA, CES, is director of operations, Accruit, LLC.
At the PCCA 2014 Mid-Year Meeting in July, Steve Chacon discussed the situations where like-kind exchanges
make sense and detailed the steps for contractors to take in order to take advantage of this opportunity.
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