LIKE - KIND EXCHANGEIncrease Cash Flow And Opportunity With An LKE
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What Is A 1031 Exchange?
When you sell equipment, you can end up paying up to 40% tax on the gain — reducing your cash flow and leaving less money to grow your business.
Section 1031 of the Internal Revenue Code allows you to defer the taxes associated with the sale of business assets, provided that you reinvest in like-kind assets.
If you sell an asset, such as a piece of equipment or a company vehicle, and use the proceeds of the sale to purchase a like-kind piece of equipment or vehicle, the taxes you would have incurred on gains may be deferred with a 1031 exchange.
A properly structured 1031 exchange meets the following criteria:
Assets exchanged must be like-kind.
A safe harbor provides for a qualified intermediary (QI) to hold sales proceeds until replacement assets are purchased.
The exchange must occur within a prescribed timeline.
The exchange must be established in advance of the sale in order to allow for the assignment of contract rights to the QI and the required notifications to relevant parties.
Increase Cash Flow
Each year, United States construction businesses sell billions of dollars in used equipment, in the process generating significant taxable gains. Many companies choose to recognize this gain and pay the associated tax, which can be up to 40% of the proceeds of the sale. There is an alternative.
Suppose you sell a fully depreciated backhoe at auction and want to purchase a new loader. The backhoe sells for $90,000. Normally, you would owe roughly $36,000 on the sale, leaving only $54,000 to purchase replacement property.
With a properly structured like-kind exchange, you can apply the entire $90,000 toward the purchase of the new loader and skip paying the tax bill and keep your cash where it belongs — in your business.
Keep Your Money In Your Business
Whether you sell one asset per year or thousands, our single exchanges, reverse exchanges and fully-managed repetitive programs are secure, convenient, and affordable, allowing you to:
Maximize your cash flow and rReduce your borrowing needs.
Pay less tax and defer taxes on gains indefinitely if you keep replacing equipment through LKEs.
Have more money to reinvest in equipment.
The Nuts And Bolts
A 1031 exchange, or like-kind exchange (LKE), allows you to defer various forms of taxes – including capital gains and depreciation recapture – when you sell a business asset or investment property and purchase another asset that is deemed like-kind.
Here’s how it works:
Engage A Qualified Intermediary
A qualified intermediary or QI (see below) Will structure the exchange, prepare related documentation, and hold proceeds from the sale of relinquished property.
Assign Rights To Sell
After negotiating a price and executing a sales contract with the buyer of the relinquished property (the property you wish to sell), you assign your rights to sell the relinquished property to the QI.
Sell Relinquished Property
The sale proceeds go to the QI who holds the funds in a special type of account required by the Treasury regulations. You have 45 days to identify up to three properties to replace the one you just sold.
Assign Rights To Buy
After negotiating a price and executing a purchase contract with the seller of the replacement property (the property you wish to buy), you assign your rights to buy the replacement property to the QI.
Buy Replacement Property
Upon your signed direction to the QI, your exchange funds will be paid directly to the seller or to the closing agent. You must close no later than 180 days after the closing of your relinquished property.
Exchange Is Complete
Congratulations! The taxes on gains are referred, so you don’t owe anything to Uncle Sam, but the IRS is happy because you followed the process layout by the Internal Revenue Code and Treasury regulations.