Aircraft Exchange

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An aircraft exchange can be the suggested outcome from your CPA when determining the tax consequences of selling a plane. Like all capital assets, selling an aircraft triggers a tax on both the gain and depreciation. If the plane’s selling price is higher than the purchase price, a federal and state capital gains tax can result. Given 50 percent -- and recent 100 percent -- bonus depreciation, allowing the purchase price to be quickly written off, the outcome is a 25 percent recapture on the depreciation taken, which can be substantial.

Like Kind

A 1031 exchange allows for the deferral of the federal and state capital gain tax when property held in a trade, business or for investment is exchanged for like kind property held in a trade, business or for investment. Property can be real or personal property, as long as both the new and old aircraft are predominantly used in the United States. An aircraft used primarily overseas is eligible as well when the replacement aircraft is also used predominantly overseas.

Aircraft is classified in the general asset class 00.21. Given both the new and old aircraft are in the same general asset class, the aircraft exchange is eligible for the tax deferral. Like class satisfies the like kind requirement for a 1031 exchange.

Types of 1031 Exchanges

An aircraft exchange can be either a forward or reverse exchange, implying the old aircraft can be sold prior to the purchase of the new aircraft or the new aircraft can be acquired before the old aircraft is sold. For green aircraft or those requiring modification such as an upgraded engine, an improvement exchange can be facilitated when the majority of the exchange can be completed within 180 calendar days. A fourth type of exchange is making improvements to aircraft already owned in what is known as a leasehold improvement exchange. Careful planning is required to fulfill the 1031 exchange rules.

Aircraft Leasehold Improvement

In a leasehold improvement exchange, at least six months prior to the exchange beginning, the aircraft must be owned by a related party. A related party is an entity where the taxpayer owns more than 50 percent of the related entity. The aircraft is leased for a thirty plus year timeframe by an Exchange Accommodator Titleholder (EAT) with the related party. Proceeds provided by the sale of an aircraft owned by the taxpayer are used towards the purchase and modification of the leased aircraft. At the end of the 180 calendar day period, the lease is conveyed from the EAT to the taxpayer, who continues to pay fair market rent to related party for at least two years, at which time the lease can be terminated between the taxpayer and the related party. The taxpayer defers the gain from the sale of the old aircraft and owns an improved aircraft by their majority ownership position in the related party.