Aircraft 1031 Exchange: Fly-Away Exemption

In an aircraft 1031 exchange, an aircraft or engine held for productive use in a business or for investment sold and acquired for an aircraft or engine of equal or greater value effectively defers the capital gain and recaptured depreciation taxes triggered by the sale. The old aircraft can be sold first followed by the purchase of the replacement aircraft, or as is typically is the case in a reverse exchange, the replacement aircraft may be acquired first followed by the selling of the old or relinquished aircraft within 180 calendar days. General Asset Class 00.21 of Revenue Procedure 87-56 classifies “airplanes (airframes and engines), except those used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines)” as like-kind.

Fly-Away Exemption

An equally compelling consideration is the sales tax imposed by the location or state where the aircraft is delivered. A state tax exemption allows non-residents to purchase and take delivery of the replacement aircraft without being subject to the state sales tax, given requirements specific to the state are satisfied. For example, a Cessna Citation is acquired for $1,000,000 to replace an older Citation in a 1031 exchange. Taking delivery in Florida subjects the sale to a six percent sales tax, or $60,000, if the taxpayer:

• Acquires the aircraft from an individual or business and not a registered Florida aircraft dealer
• Is a resident of Florida
• Operates a business in Florida providing employment
• Uses the aircraft in a business based in Florida
• Is a corporation whose officers are Florida residents
• Does not remove the aircraft or fly to another state within ten days

States with Broadly Defined Fly-Away Exemptions

States with Limited or Narrowly Defined Fly-Away Exemptions

Pennsylvania does not have a fly-away exemption from their 6 percent sales tax though sales of helicopters and like rotorcraft are exempt from Pennsylvania sales taxes.

Even with fly-away exemptions, fulfilling the requirements may not be possible. For example, Georgia permits the exemption only if the sale is for aircraft manufactured or assembled and also delivered in Georgia for use outside the state, given the purchaser takes possession from the manufacturer or assembler in Georgia for the express purpose of flying it out of state when the aircraft or equipment cannot be removed by other means. Contrast Georgia’s limited fly-away exemption with Indiana’s broad exemption given the taxpayer is a non-resident and the aircraft is removed from the state within 30 days following delivery, and the aircraft is titled or registered for use in another state or country.

States Without Fly-Away Exemptions

States with no sales or use taxes include Alaska, Delaware, Montana, New Hampshire, and Oregon, while Massachusetts and Rhode Island exempt sales and use taxes for aircraft.

Though independent of the 1031 exchange, taking delivery of the replacement aircraft in a state where the fly-away exemption requirements can be met or in states where no sales tax is imposed will avoid an additional tax of 2 to 11 percent of the aircraft purchase price.

Learn more about important steps to an aircraft exchange by clicking on the button below for a “10 Point Aircraft 1031 Exchange Checklist.”