Business Aircraft 1031 Exchange Case Study

A Fortune 500 Company was selling its aircraft for $16.0 Million. The aircraft had a zero tax basis resulting in $16.0 Million of depreciation recapture. Their intent was to replace the old aircraft with a replacement aircraft valued at $30.0 Million. Ideally, they would have sold the old aircraft first which would initiate a simple forward exchange, then identified replacement aircraft within 45 days, and subsequently closed on the purchase of the replacement aircraft within the 180 days allowed under the 1031 exchange “safe harbor” regulations.

Problem: The Company needed to purchase the replacement aircraft prior to selling the old aircraft because they hadn’t yet located a buyer for the relinquished aircraft, and the replacement aircraft was immediately available.

Solution: TVPX set up an Exchange Accommodation Titleholder entity in accordance with Revenue Procedure 2000-37 to purchase the replacement aircraft on the Company’s behalf and leased it to the Company with an option to purchase. The Company was able to use the aircraft, but was not the actual titleholder. Once a buyer was found for the old aircraft, it was sold beginning a 1031 tax-deferred exchange.

The Company subsequently purchased the replacement aircraft from the Exchange Accommodation Titleholder to complete the 1031 Exchange. Sales tax planning was also critical to ensure sales tax was not paid on both transfers of the replacement aircraft, which could partially negate the benefits of the 1031 Exchange.

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