From: Will the Economic Stimulus Act Make A Difference?
Deferring Taxes With Like-Kind Exchanges
If you’re looking to maximize the value of used equipment, you would generally sell it on the private market rather than trade it in on other machines. Or you might sell some equipment at auction. Either way, the price you receive may be more than the depreciated value of the equipment. And unless you do a like-kind exchange under Section 1031 of the federal tax code, your income from the gains is taxed as ordinary income.
 |
| Photo: Chase Equipment |
| Despite a weak US economy, construction equipment continues to hold its value relatively well, thanks largely to the longevity of the equipment. |
With a like-kind exchange, you use the proceeds of your sale to buy other construction equipment. The Internal Revenue Service allows you to defer taxes on the gain until the replacement property sells. But then you can do another like-kind exchange, so in effect you can defer taxes indefinitely. If you don’t spend all of the money from the sale, you’re taxed on the portion of gain that you don’t spend. (Please consult with your tax adviser for more details.)
Like-kind exchanges free up more money to spend on new equipment, says Dale Ruther, a partner at the accounting firm of Bober, Markey, Fedorovich & Co., Akron, OH. Let’s say you purchased a piece of equipment for $100,000 and it depreciates to $40,000. If you sell that piece for $80,000, you would normally have to pay ordinary income tax rates (probably 35%) on most or all of your $40,000 gain.
But with a like-kind exchange, you can apply all $80,000 to the price of more equipment—and not pay the income taxes just yet. Probably you would do a deferred exchange. That means using a qualified intermediary to hold the money in a qualified exchange account until replacement equipment is identified. The intermediary then pays for the new equipment from the account, says Jim Burnett, director of business development at Accruit LLC, an intermediary based in Lakewood, CO.
Accruit charges a flat fee per transaction, starting at $1,000, so even the smallest individual sales can participate in an exchange. Very significant percentages of the dealer networks of Caterpillar, John Deere and Komatsu use Accruit as their intermediary in equipment transactions, says Burnett. Accruit is the preferred provider of Associated Equipment Distributors (AED), the exclusive like-kind exchange provider for Ritchie Bros. Auctioneers and the exclusive Affinity Partner for the Construction Financial Management Association (CFMA).
Deferred exchanges are subject to complex rules, says Ruther. You should consult with a tax professional before participating in such a transaction. The qualified intermediary cannot be your brother, your accountant, lawyer, or banker. You must use a disinterested third party—a qualified intermediary—or the IRS will not view it as a Safe Harbor transaction as the tax code requires. And you get 180 days from the sale of your equipment to purchase the new machines.
What equipment qualifies as a like-kind exchange? If you’re selling construction equipment, you must spend the proceeds on construction equipment to qualify, says Burnett. “You can sell a fleet of skid-steers and buy a wheel-loader,” he says, “Or you can sell an excavator and buy a paver. You can modify your fleet to fit market demands and business needs.”
You can also do a “reverse exchange,” in which replacement equipment is purchased before the old equipment is sold. Reverse exchanges are subject to complicated rules and timetables, so professional guidance is recommended.
If you’re an equipment dealer or a contractor with a high annual turnover of equipment, you can realize additional benefit from a program of repetitive exchanges, rather than a series of smaller single exchanges, says Burnett. Accruit tracks all sales and purchases, calculates how much depreciation you can carry forward, and how much gain you defer over time. For that kind of program, a firm is usually buying and selling $1 million in equipment annually, says Burnett.
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“When we get into larger transactions, say over a half-million dollars, we look into like-kind exchanges,” says the controller of one large contractor based in the Midwest. “But if we bring in a bunch of pickups to auction, we don’t worry about like-kind exchanges. They carry some administrative costs.”
“We did a reverse exchange,” says another contractor who worked with Accruit. “We bought the new equipment and then sold the old machines. Accruit is one of the intermediaries that can do these exchanges. I use them to help me put the documents together, and they do an excellent job.”
September-October 2008
From: Will the Economic Stimulus Act Make A Difference?
Deferring Taxes With Like-Kind Exchanges
If you’re looking to maximize the value of used equipment, you would generally sell it on the private market rather than trade it in on other machines. Or you might sell some equipment at auction. Either way, the price you receive may be more than the depreciated value of the equipment. And unless you do a like-kind exchange under Section 1031 of the federal tax code, your income from the gains is taxed as ordinary income.
|
| Photo: Chase Equipment |
| Despite a weak US economy, construction equipment continues to hold its value relatively well, thanks largely to the longevity of the equipment. |
With a like-kind exchange, you use the proceeds of your sale to buy other construction equipment. The Internal Revenue Service allows you to defer taxes on the gain until the replacement property sells. But then you can do another like-kind exchange, so in effect you can defer taxes indefinitely. If you don’t spend all of the money from the sale, you’re taxed on the portion of gain that you don’t spend. (Please consult with your tax adviser for more details.)
Like-kind exchanges free up more money to spend on new equipment, says Dale Ruther, a partner at the accounting firm of Bober, Markey, Fedorovich & Co., Akron, OH. Let’s say you purchased a piece of equipment for $100,000 and it depreciates to $40,000. If you sell that piece for $80,000, you would normally have to pay ordinary income tax rates (probably 35%) on most or all of your $40,000 gain.
But with a like-kind exchange, you can apply all $80,000 to the price of more equipment—and not pay the income taxes just yet. Probably you would do a deferred exchange. That means using a qualified intermediary to hold the money in a qualified exchange account until replacement equipment is identified. The intermediary then pays for the new equipment from the account, says Jim Burnett, director of business development at Accruit LLC, an intermediary based in Lakewood, CO.
Accruit charges a flat fee per transaction, starting at $1,000, so even the smallest individual sales can participate in an exchange. Very significant percentages of the dealer networks of Caterpillar, John Deere and Komatsu use Accruit as their intermediary in equipment transactions, says Burnett. Accruit is the preferred provider of Associated Equipment Distributors (AED), the exclusive like-kind exchange provider for Ritchie Bros. Auctioneers and the exclusive Affinity Partner for the Construction Financial Management Association (CFMA).
Deferred exchanges are subject to complex rules, says Ruther. You should consult with a tax professional before participating in such a transaction. The qualified intermediary cannot be your brother, your accountant, lawyer, or banker. You must use a disinterested third party—a qualified intermediary—or the IRS will not view it as a Safe Harbor transaction as the tax code requires. And you get 180 days from the sale of your equipment to purchase the new machines.
What equipment qualifies as a like-kind exchange? If you’re selling construction equipment, you must spend the proceeds on construction equipment to qualify, says Burnett. “You can sell a fleet of skid-steers and buy a wheel-loader,” he says, “Or you can sell an excavator and buy a paver. You can modify your fleet to fit market demands and business needs.”
You can also do a “reverse exchange,” in which replacement equipment is purchased before the old equipment is sold. Reverse exchanges are subject to complicated rules and timetables, so professional guidance is recommended.
If you’re an equipment dealer or a contractor with a high annual turnover of equipment, you can realize additional benefit from a program of repetitive exchanges, rather than a series of smaller single exchanges, says Burnett. Accruit tracks all sales and purchases, calculates how much depreciation you can carry forward, and how much gain you defer over time. For that kind of program, a firm is usually buying and selling $1 million in equipment annually, says Burnett.
“When we get into larger transactions, say over a half-million dollars, we look into like-kind exchanges,” says the controller of one large contractor based in the Midwest. “But if we bring in a bunch of pickups to auction, we don’t worry about like-kind exchanges. They carry some administrative costs.”
“We did a reverse exchange,” says another contractor who worked with Accruit. “We bought the new equipment and then sold the old machines. Accruit is one of the intermediaries that can do these exchanges. I use them to help me put the documents together, and they do an excellent job.”