Aircraft and engines used primarily for business are eligible for aircraft 1031 exchange tax deferral treatment when sold and a replacement aircraft or engine of equal or greater value is purchased.
If the aircraft appreciated in value or was depreciated for several years, the sale triggers federal and possibly state capital gains tax. These taxes can represent 40% or more of the sale. If the intent is to replace the aircraft or engine, the taxes can be deferred indefinitely by initiating a 1031 exchange. The taxes are due when the replacement aircraft is sold or they continue to be deferred with another 1031 exchange. Each of the following 1031 exchange rules must be satisfied for an aircraft 1031 tax exchange.
Aircraft 1031 Exchange Rules
Like Kind: Both old and new aircraft must be like-kind to one another. All aircraft and helicopters except commercial aircraft used in transporting cargo or passengers are treated as like-kind under IRS General Asset Class 00.21. Commercial or scheduled charter aircraft must be replaced under Standard Industry Classification 3872. Engines and aircraft components are also eligible for 1031 exchanges. Aircraft can be exchanged in either a forward 1031 exchange or reverse 1031 exchange.
Exchange Accommodator Titleholder: In a reverse 1031 exchange, the new aircraft is acquired prior to the sale of the old aircraft. The Internal Revenue Service requires that either the new or old aircraft is titled or parked with an Exchange Accommodator Titleholder (EAT). The EAT is a single member limited liability company registered with the Federal Aviation Administration (FAA) in Oklahoma City, Oklahoma using the Limited Liability Company Registration Information Sheet. FAA Form 8050-1 is the Aircraft Registration Application to register the aircraft. Typically, the new aircraft is titled to the EAT in a reverse 1031 exchange. While held by the EAT,the Exchangor has full use of both the new and old aircraft. A triple net lease is created between the EAT and Exchangor where the Exchangor agrees to pay all associated taxes, insurance and maintenance on the aircraft. When the aircraft is listed and sold to the buyer. FAA Form 8050-2 is completed and filed with the FAA in Oklahoma City. For a complete and current set of Aircraft Certification and Registration Forms. Care must given to completing the documents successfully the first time to avoid the paper trail to correct the issue which can take months.
Qualifying Use or Intent: Facts such as time log must support qualifying use for business, trade or investment for both the relinquished and replacement aircraft. Similar to real and other personal property, 1031 exchange properties must reflect minimal personal use.
Equal or Greater in Value: If the intent is to defer 100% of the gain, the replacement aircraft must be equal to or greater in value than the old aircraft. The purchase price plus purchase expenses must be equal to or greater than the sales price less selling expenses.
Time frames: In a reverse exchange, the old aircraft must be identified in writing preferably to the Accommodator by the forty fifth calendar day post closing on the new aircraft. The old aircraft must be sold by 180th calendar day post the first closing.
Same Taxpayer: The taxpayer who sells the aircraft must be the taxpayer who acquires the new aircraft. Individuals, trust, corporations or limited liability companies, foreign individuals and companies can initiate an aircraft 1031 exchange.
Foreign Property: Predominant use determines whether the aircraft is considered US or foreign property. If predominant use indicates a foreign property, then the foreign aircraft cannot be exchanged for an aircraft with predominant use in the US.
Specific to each state are Use, Sales and Excise tax issues that must be thoroughly understood with the help of your tax advisor. Generally, sales taxes are collected by the seller of the replacement aircraft for the local taxing authority while use taxes are payable by the replacement aircraft buyer if the seller does not collect sales tax.
Aviation Tax Consultants, LLC
We suggest contacting the tax consultants at Aviation Tax Consultants, LLC.
Aviation Tax Consultants, LLC assists aircraft purchasers in acquiring aircraft in a tax efficient manner. Their services include the elimination or reduction of sales tax at the time of purchase, maximizing income tax savings, controlling the cost of personal use of the aircraft, complying with passive activity loss and related party leasing rules and Federal Aviation Regulations. Cooperation with client’s current tax and legal advisor's is welcome and encouraged. Their typical client is owner-flown part 91 pilots.
Questions to consider:
Use Tax
- Is the aircraft being purchased by an Aircraft Dealer, lessor or by the user of the aircraft?
- What state is the aircraft hangared?
a. Does the hangared state collect use tax on aircraft?
- What state does the Exchangor maintain residency?
- Is this a purchase to lease?
- If so, does the Exchangor have a lease to use with the EAT, separate from the aircraft lease?
Sales Tax
- In what state will be the aircraft be purchased.
- Is the seller of the aircraft a licensed Aircraft Dealer?
a. In what state does the sale occur and what are the sales tax issues?
i. "Fly Away Exemption."
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