Investment Recovery professionals should be aware of a capital gains tax deferral tool that they can integrate neatly into the asset disposition planning process. This tool is a tax strategy called the 1031 exchange, also known as a like-kind exchange (LKE). 1031 exchanges derive their name from Section 1031 of the United States Tax Code, which has been on the books since 1921. The law allows a business to postpone paying capital gains tax on the sale of one asset if the proceeds
exchanges are common. However, a vast majority of senior executives in potentially affected companies don’t realize that 1031s apply to far more than real estate. Since these industry leaders don’t know that they can maximize their cash flow through LKEs, they wind up handing over critically needed cash to the IRS. For instance, recycled tubing or unused valves in the oil and gas industry are candidates for a like-kind exchange. A lift truck or the vehicle fleets in the utility industry are also potential business assets that can be used in a like-kind exchange. Even scrap metal that’s recycled can be exchanged. The list goes on, from corporate jets to manufacturing hardware, from heavy equipment to intangibles such as mineral rights and licenses.
Literally, any asset held for business or investment purposes is eligible. No matter what industry a business is in, odds are pretty good that the word “green” has come up lately. The drive toward more sustainable operations means different things in different places— from replacing dated HVAC systems to transforming wasteful manufacturing processes into competitive advantages (note the Wall Street Journal’s recent profile of Subaru of Indiana, for example) to upgrading fleets to comply with stricter state emissions regulations—but it’s a rare business that can afford to be cavalier about uneconomical processes.
Whether conducting investment recovery of business assets or a real estate 1031 exchange, this established tax code is integral to any sound asset management strategy. If a company is paying taxes, it’s likely leaving too much valuable investment recovery cash on the table. Transforming idle assets into improved cash flow is the outcome of a 1031 exchange. There are several types of LKEs,
from one-time exchanges to “reverse” exchanges (where you can buy your replacement asset before selling) to robust 1031 exchange programs that handle large numbers of assets on an ongoing basis. In all cases, though, LKEs can generate the cash necessary to support a fully efficient investment recovery program, providing a substantial operational and competitive advantage.