Tax-Free Exchanges of Aircraft Under Section 1031
Under Section 1031
© 1999 KEITH G. SWIRSKY
A. Basis Issues in Multi-Asset Exchanges
As mentioned above, one who engages in a like-kind exchange generally recognizes no income on the disposition of one's relinquished property; instead that income becomes taxable if and when the replacement property is disposed of in a taxable transaction. This deferral of income is accomplished by assigning one's "basis" in the relinquished property to the replacement property. Such deferral, however, is not accomplished without a price. The taxpayer will obtain a reduced basis in the replacement aircraft which will reduce depreciation deductions while the replacement aircraft is owned by the taxpayer.
The computation of basis is also important in exchanges involving boot, because one may be liable for tax to the extent of gain realized, which is the difference between the basis in the relinquished property and the amount of property received in the transaction. When a transaction involves more than one relinquished property or more than one replacement property, however, the determination of basis in the replacement property is somewhat more complicated.
In the case of an exchange of multiple properties, the Regulations generally require a property-by-property comparison for computing the gain realized and basis of replacement property received in a like-kind exchange. However, if the various relinquished properties transferred by a taxpayer in an exchange can be assigned to two or more "Exchange Groups," gain and basis may be determined on an Exchange Group-by-Exchange Group basis. For these purposes, an Exchange Group consists of all relinquished and replacement properties in one exchange which are of like kind. All properties of like kind or like class must be grouped together in the same Exchange Group. In other words, all properties within the same General Business Asset Class and within the same four-digit Product Code, respectively, would be in the same Exchange Group.
No gain will be recognized if the aggregate value of the relinquished properties in each Exchange Group transferred equals the aggregate value of the replacement properties in the same Exchange Group. Within one Exchange Group, if the aggregate fair market value of the replacement property exceeds the aggregate fair market value of the relinquished property, the excess is allocated to other Exchange Groups. Such excess value allocated is treated as "other property or money" received in the exchange, i.e., boot, and is therefore taxable.