PCCA Journal 3rd Quarter 2014 - page 9

PCCA Journal|3
Quarter 2014
Contractors Can Profit
from Like-Kind Exchanges
By Steve Chacon and Martin S. Edwards
Continued on page 10
t was a pleasure to speak at the PCCA Mid-Year
Meeting. The focus of our discussion was Section
1031, like-kind exchanges, which essentially give tax-
payers the right to transfer value from one business
or investment property to another one of “like-kind,”
without paying income taxes on any gain in the process. As
the Internal Revenue Code puts it in section 1031(a)(1): “No
gain or loss shall be recognized on the exchange of property
held for productive use in a trade or business or for invest-
ment if such property is exchanged solely for property of like-
kind which is to be held either for productive use in a trade
or business or for investment.”
The government’s rationale behind like-kind exchanges
is that the exchange of one piece of property for another of
equal or greater value is essentially a continuous investment
and, therefore, shouldn’t be taxed.
Exchanging Old for New
What does this have to do with your equipment? Equipment
is a form of property that qualifies for an exchange. To under-
stand why the owner of equipment should consider exchange
transactions, let’s take a look at the following situation:
Equipment is sold at the end of its useful life because own-
ers are interested in updating their equipment. To make the
point, look at the following simplified numbers pertaining to
a single piece of equipment.
In most cases, having $80,000 less to invest in new equip-
ment is not the best alternative. The best alternative is to
structure the same transaction as an exchange of like-kind
When done correctly, the $80,000 goes into new
property instead of going to the IRS.
Does the equipment owner avoid the tax completely?
Sometimes, as the deferral can be continuous in the sense
that the new equipment can be exchanged again, continuing
the deferral of taxes. It is rare that successful equipment own-
ers will not seize every opportunity to extend the use of cash
available to them. Even if owners defer only the tax liability,
they still have the use of their most valuable business com-
modity: cash.
But at what level does a like-kind exchange make sense?
Owners find that exchanges can be worthwhile for equip-
ment that has a residual market value of as little as $5,000 to
$10,000, depending on the volume of the equipment being
exchanged. Various kinds of equipment can be subject to
consideration of tax deferral, including the following:
• Construction Equipment
• Manufacturing Equipment
• Packaging Equipment
• Aircraft
• Restaurant Assets
• Rail Cars
• Printing Equipment
• Computer Equipment
• Automobiles
• Trucks
The list is nearly endless, and most types of property
should be considered for like-kind exchanges. It is important
to note, while equipment held as part of a rental fleet can
qualify for like-kind exchange treatment, equipment held as
inventory will not qualify.
Mechanics of a Like-Kind Exchange
How does a like-kind exchange work? The original concept
called for a swap of like-kind property between two owners
at the same time. The regulations have since developed to the
point where owners can now negotiate the sale of equipment
to one party and arrange the acquisition of new equipment
from a completely unrelated third party. Furthermore, it
Original Value of Old Equipment
Depreciation Taken
Tax Basis
Sale Price
Less the Tax Basis
- $0
Recapture of the Depreciation
Tax Rate
x 40%
Tax Due
Cash from Sale
Cash Available for New Equipment
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