At 39.1 percent, the U.S. corporate income tax rate (average combined federal and state) is the highest in the industrialized world. Most of us want to find ways to (legally) limit our taxes. For equipment lessors, one of the best and most commonly overlooked ways to limit/defer taxes is to “exchange” (rather than sell outright) old or obsolete equipment.
Many people have been led to believe 1031 exchanges are available only on real estate, but this is not true. “Personal property” (rental equipment) 1031 exchanges have been available since at least 1935.
What is a 1031 exchange?
A 1031 exchange is an “exchange” (for tax purposes) of “qualifying” property, including rental equipment, for other “like-kind” property that enables an equipment lessor to avoid paying tax immediately upon the sale of rental assets. This allows the lessor to use the money that would otherwise be used to pay taxes to, instead, buy more and/or better replacement equipment.
Section 1031(a)(i) of the Internal Revenue Code states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Following is an example of an ordinary sale: