Aircraft owners who have held their helicopter or aircraft in the productive use of a trade or business are eligible to initiate a 1031 exchange to defer the federal and state capital gain and depreciation recapture taxes when selling and replacing with another aircraft. Internal Revenue Code Section 1031 encourages aircraft owners to use the otherwise payable tax dollars as interest free working capital towards the replacement aircraft. When considering a 1031 exchange, there are many rules that must be followed or the two legged transaction may be overturned by the Internal Revenue Service.
CPA Input
The first step in initiating a 1031 exchange is to visit with the owner’s CPA to understand the tax consequences of selling the business aircraft. Does the usage satisfy the business use requirements? Given the owner’s intent is to replace the aircraft, the next step is to talk with a Qualified Intermediary (QI) to understand the 1031 exchange process.
QI Input
The QI–preferably a Certified Exchange Specialist®–will ask a number of questions to understand the transaction and respond to how a 1031 exchange works. A 1031 exchange can either be a forward or reverse exchange. In a forward exchange, the old or relinquished aircraft is sold prior to acquiring the replacement. In a reverse exchange, the replacement aircraft is acquired before the relinquished is sold. A forward exchange is not as complex as a reverse; consequently, the QI fee is less. An Exchange Accommodator Titleholder (EAT) is required to park or take title to either the new or the old aircraft in a reverse. The EAT leases the parked aircraft to the exchangor, allowing full use and responsibility for the aircraft. The EAT is added as an additional insured to the parked aircraft insurance policy. The QI will work with the closing title company to register the aircraft with the Federal Aviation Administration.
Assignment Language
The exchangor enters into a Purchase and Sale Agreement (PSA) for either the new or old aircraft. In every 1031 exchange, the QI acts for the benefit of the exchangor by being assigned the rights, not the obligations, of the PSA. Per the 1031 code requirements, this allows the QI to receive the net sale proceeds for use to acquire the replacement aircraft. Assignment language is not required when selling because the buyer’s approval is not necessary to assign the rights. When buying, the Seller’s approval is required to assign the PSA rights. To view the assignment language, go to the following link.
Fly-Away Tax Exemption
Consideration must be given to whether or not the state where the aircraft is delivered assesses a sales tax. Many states offer a fly-away exemption given certain conditions are satisfied, such as the number of days the aircraft will be located in the state and if the buyer is a non-resident. Sales taxes range from two to eleven percent of the aircraft purchase price. Be sure to understand the impact of the delivery location.
Testimonials
View testimonials from aircraft owners who have engaged Atlas 1031 Exchange. The 1031 exchange process is straight forward. To learn more about 1031 exchange, click on the button below to download “10 Point Aircraft 1031 Exchange Checklist” or call our office to discuss your transaction.
