Assets in this category tend to depreciate for tax purposes more rapidly than for resale purposes. The resulting gain from recapture can be substantial and the motivation to use a §1031 exchange is high. Furthermore, aircraft owners typically need to have the aircraft in use for its intended purposes and this is not as easy to accomplish when using a delayed exchange. Hence, the utility of a reverse exchange from an asset utilization point of view is high. There are numerous differences between a reverse exchange of aircraft and a reverse exchange of real estate. Some of these issues are:
- Differences in documentation. This applies both to the exchange documents and the additional FAA documents (e.g. Bill of Sale, Registration Application, Statement of LLC) required for a sale or purchase and subsequent lease.
- Tests of like kind status, foreign versus domestic use, feasibility of exchanging fractional interests. Various facts and circumstances need to be understood to fully accommodate a strategy that maximizes deferment potential while maximizing utilization.
- Perfection of interests. All parties, including EATs and QIs, to an aircraft transaction must be Capetown registered in order to convey and receive title to assets in this category.
- Ancillary tax strategies. Sales and use taxes can be substantial and a strategy encompassing both acquisition and disposition of aircraft to be exchanged needs to be developed and executed in conjunction with the Exchangor’s tax advisors that is most favorable to the Exchangor.
We have substantial experience with reverse exchanges of aircraft and engines and look forward to assisting you if you are contemplating a reverse exchange.