One of the primary advantages to a reverse exchange is that you can acquire and use the new equipment before the old equipment is sold. The disadvantage is that it is more costly to participate in this type of an exchange. Whereas most LKEs cost around $1,000 to set up, the fee charged to set up a reverse exchange is normally several thousand dollars.
Larger contractors that buy and sell multiple pieces of equipment during the year can take advantage of an ongoing program of LKEs.
There are a couple advantages to an LKE program vs. separately structuring each sale and purchase as an exchange. First, a single exchange agreement (referred to as a Master Exchange Agreement) can be executed up front and apply to all future exchange transactions. Second, the Internal Revenue Service provides certain safe harbors to companies that take advantage of an LKE program. When set up properly, there is no disadvantage to an LKE program.
Although the economy has shown signs of improvement, we still face the threat of another recession. The large drop in the stock market the day after President Obama was re-elected is proof that investors are on edge and uncertain of what happens next. Contractors do not need to let this uncertainty hold them back if they take advantage of strategies such as LKEs that are available right now.