Jeff Nelson of PWC comments, "The transaction described is fairly common in the industry and customers and dealers should be able to structure these types of contingent/consignment value contracts in compliance with the rules of IRC Sec 1031 even without the services of a Qualifed Intermediary. However, Like Kind Exchange is extremely dependent on the proper form of the transaction. There are no short cuts and customers/dealers must be careful to respect that form when structuring their trade-ins..."
Jim Burnett of Accruit LLC stated that "pass-throughs without a Qualifed Intermediary involved may fall ourside of the safe harbor guidelines as established in IRC 1031. The fact that there is typically a delay between the time the original asset is transferred to a dealer, and the date replacement property is acquired raises questions. Like Kind Exchanges are not optional. Guidance suggests that 1031 exchanges are form over substance, meaning that if it looks like an exchange, the taxpayer must follow a specific process, including execution of an exchange agreement, notification of assignment in writing, inclusion of a Qualified Intermediary (to avoid constructive receipt), and completion of Form 8824 as part of the taxpayer's tax filing. Additionally, given the tremendous benefit and low cost of single exchanges, even the smallest equipment transaction can be run as a safe harbor LKE."
See the diagrams in this article which highlight the pass-through and safe-harbor Like Kind Exhange transactions. As you can see, LKE's are complicated and even the experts have a hard time agreeing on certain issues.
Jeff Nelson can be reached at ph. (612) 889-5973 or email@example.com. Accruit, by the way, has a document that discusses this issue in more detail. Please contact Accruit at ph. (720) 963-5000 to receive your copy.
LKE's can provide a significant benefit for rental companies, dealers and contractors if used properly. Please make an effort to understand the basic LKE qualification concepts and be wary of any transaction where a qualified intermediary is not part of the process. The sales tax issues should also be reviewed with your tax advisor.
Editor's Note: This article is not intended to be tax advice. Readers should contact their tax accountants for professional tax service.
Garry Bartecki is director of dealer/distributor services at BDO Seidman LLP of Chicago, as well as consultant to Associated Equipment Distributors (AED). He has also worked as an independent CPA and consultant to equipment dealers. He can be reached by phone at (312) 616-4677 or email at firstname.lastname@example.org.