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Many rental companies, dealers and contractors are taking advantage of like-kind-exchange (LKE) transactions to defer taxable gains on qualifed sales of used equipment, and if you meet the LKE requirements there is little reason not to use the concept if you have current taxable income to offset, or are likely to have taxable income in the near future.

While LKE might sound like an easy thing to do, it can get very complicated, with staying in compliance a real challenge. There is, however, flexibility in the process, giving taxpayers the ability to choose to use LKE or decide to have the taxable gain reflected in their taxable income.

The way LKE works, an equipment owner can sell a business asset at a gain and defer the gain (calculated using tax depreciation) to some future date as long as they use the sales proceeds to purchase a qualified replacement unit. The amount of the gain deferred has to reduce the tax basis in the new replacement property and as a result, the deprecation deduction going forward is now lower then it would have been had LKE not been used. For example:

• Machine sold for $50,000 with zero tax basis (fully depreciated).
• New machine purchased for $200,000.
• With LKE, the $50,000 gain is deferred, you have a $20,000 LKE benefit and the tax basis in the new unit is $150,000.

Depreciation going forward without LKE is $40,000 the first year versus $30,000 if you use LKE; a simple example but you get the idea.

Another LKE requirement is that the sales proceeds be restricted until they are used to purchase the new unit or pay down equipment-related debt. In addition, these funds should be held by a "qualified intermediary" until the funds are used to repurchase replacement property, pay down equipment related debt or are removed from the account as a taxable distribution. As you can see, this subject can get complicated and with more and more equipment owners using LKE to manage their tax position and cash flow, it is imperative to be certain of your tax positions.