Because aircraft usually maintain a high resale value and have a relatively short depreciation period for tax purposes, the sale of an aircraft will often result in a substantial amount of gain.  Furthermore, much of that gain will be recapture income, which is taxable at ordinary income rates to reflect prior depreciation deductions.  The maximum ordinary income rate is 25% for an individual and 35% for a corporation (plus applicable state taxes). These factors can combine to result in a substantial tax liability for the seller of an aircraft.

Since many aircraft sellers will invest their proceeds in the purchase a newer and larger aircraft, a Section 1031 Exchange is an efficient way to minimize gains taxes and preserve capital.

 

The basic requirements for an aircraft exchange are similar to those of a real property exchange, including:

 

1.  Both the ‘Relinquished’ aircraft and the ‘Replacement’ aircraft must be ‘used in a trade or business, or held for investment.’

 

2. The Relinquished and the Replacement aircraft must be ‘like-kind’ pursuant to the regulations.

 

Note that the like-kind requirements for personal property, including aircraft, are considered to be more restrictive than the like-kind requirements for real property.  Please visit our page titled ‘The Aircraft Like-kind Requirements’ to learn more about satisfying the like-kind test.

 

Aircraft Exchanges can be structured either as a ‘Forward’ or ‘Delayed’ exchange, wherein the Relinquished aircraft is sold prior to the acquisition of the Replacement Aircraft; or it can be structured as a ‘Reverse’ exchange, wherein the Replacement aircraft is acquired before the Relinquished aircraft is sold.  Reverse exchanges are fairly common with aircraft, as many owners often will first acquire the new aircraft before completing their sale to ensure that they will have uninterrupted availability of their asset. 

We encourage you to obtain competent advice regarding the facts and circumstances relating to your exchange, and that you do so early in the planning stages.  This should enable your exchange to meet IRS guidelines while enabling you to maintain operational flexibility regarding the use of both your Relinquished and Replacement Aircraft.  It should also help you plan to minimize your exposure to the sales and use tax issues that often arise when large and expensive assets such as aircraft are acquired and sold. 

An aircraft exchange requires careful coordination among attorneys for the buyer and seller of the aircraft, the lender and its attorneys (since debt is almost always involved) and special FAA counsel.  The professionals of Beacon Exchange Company have substantial experience and expertise in structuring Section 1031 aircraft exchanges, and in purchasing, selling and financing aircraft transactions.  This experience will be of value to you when planning your aircraft exchange. 

If you are contemplating the purchase and sale of an aircraft, please contact Beacon Exchange Company.  We look forward to hearing from you.