1031 Like Kind Exchanges (LKE)
Convert Tax Liabilities into Cash for Operations
If you have sold your equipment at an auction, you know the process:
- Consign your equipment.
- Buyers purchase it from you on sale day.
- You write a check to the Internal Revenue Service.
What Is A 1031 Like Kind Exchange?
1031 Like-Kind Exchanges (LKEs) get their name directly from U.S. Tax Law. Found under code section 1031, the law clearly states that if a property owner structures the sale of certain assets (such as heavy equipment, vehicles, real estate, etc.) as an LKE, then reinvests the related proceeds into the purchase of like-kind assets, the taxpayer will defer recognition of that tax liability indefinitely. LKEs are incredibly powerful and have been a part of the tax code for nearly 100 years. LKEs have endured testing by the Internal Revenue Service, state taxing authorities and the federal and state court system. Best of all, LKE basics are fairly easy to understand. The bottom line: LKE’s possess a long track record enabling sellers of equipment to transform tax losses into critically needed cash for operations.You’ll Like What A 1031 Can Do For Your Cash Flow.
Here’s an example: CraneCo is selling a fully depreciated crane at auction, and wants to purchase a smaller crane along with a loader. The crane sells for $900,000. Under normal circumstances, CraneCo would owe the federal and state taxing authorities roughly $360,000 on the sale, leaving only $540,000 to purchase replacement property. However, if CraneCo structured the transaction as an LKE, they can apply the entire $900,000 toward the purchase of the new equipment. By implementing an LKE strategy, CraneCo is able to keep its cash where it belongs—working in their business.Without LKE
With LKE
Original Equipment Cost
$1,200,000
$1,200,000
Tax Depreciation Allowed
1,200,000
1,200,000
Tax Basis at Sale
–
–
Sale Price of Equipment
900,000
900,000
Gain on Sale
900,000
900,000
Tax Due on Gain (40% Tax Rate)
360,000
–
Cash Available for Replacement Equipment
540,000
900,000
Is Like Kind Exchange Right For Your Business?
- Are you a taxpayer?
- Could your company benefit from improved cash flow?
- Do you replace assets?
- Do your assets hold their value?
- Do you need flexibility in your portfolio?