Aircraft and engines used primarily for business are eligible for a 1031 aircraft exchange for a replacement aircraft or engine of equal or greater value. Like real property or real estate held for investment, an aircraft sale triggers similar tax consequences. Upon sale, there is the potential of a capital gains tax on appreciation and a recaptured depreciation tax on the depreciation taken. Both can be deferred indefinitely by initiating a 1031 exchange on the replacement aircraft or engine. Each of the following requirements must be satisfied.

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 tax deferred exchanges. Aircraft can be exchanged in either a forward exchange or reverse exchange following the 1031 exchange guidelines.

Qualifying Use or Intent: Facts such as time log must support qualifying use or intent for both the relinquished and replacement aircraft is business, trade or investment. Similar to real estate, personal use must be kept to a minimum.

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.

Timeframes: Replacement property must be identified in writing preferably to the Accommodator by the forty fifth calendar day post closing of the old aircraft. The replacement property must be purchased by 135th day for a total of 180 calendar days post the first closing.

Same Taxpayer: The taxpayer who sells the aircraft must be the same taxpayer who purchases the new aircraft. Individuals, trust, corporations or limited liability companies can initiate an exchange for aircraft.

Foreign Property: The exchange of domestic real or personal property for foreign real or personal property is not eligible for 1031 consideration. Special rules apply to determine whether the property was predominantly used in the United States.

Specific to each state are Use and Sales 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 purchaser if the seller does not collect sales tax. Questions to consider are:

Use Tax

1. Is the aircraft being purchased by a licensed dealer, lessor or by the user of the aircraft?
   
2. What state is the aircraft hangered?
   a. Does the hangered state collect use tax on aircraft?
   
3. What state does the Exchangor maintain residency?

Sales Tax

1. Is the seller of the aircraft a licensed retail seller?
   a. In what state does the sale occur?
   b. If another state, does that state collect sales tax.
       i. "Fly away exemption."

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