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Like Kind Exchange for Equipment Lessors
Under the general rules of Like Kind Exchange (“LKE”), no taxable gain (or loss) is recognized, and no tax is due, where property held for use in a trade or business (including tax leased property) is exchanged solely for like-kind property that is also to be held for trade or business purposes. Assuming all requirements of LKE are met, if you dispose of an business asset and subsequently reinvest your sales proceeds to acquire a “like-kind” replacement asset of equal or greater value, then the recognition of taxable gain (along with the lessor's obligation to pay tax on that gain) is deferred until the replacement asset is sold or, in the case of subsequent follow on exchanges, until the replacement's replacement asset is sold in a taxable disposition.
The benefits of LKE for equipment lessors are clear. LKE programs (which seek to institutionalize LKE as a normal part of a lessor's lease origination and remarketing processes) allow lessors to defer federal and state taxation of gains when lessors systematically dispose of their off-lease equipment and subsequently replace that equipment with new leases of like kind equipment. The LKE deferral rules enable lessors to reinvest 100% of their proceeds back into their business instead of using a significant portion of those proceeds to pay federal and state income tax on gains. If a lessor's applicable federal and state tax rate is 40%, this gain deferral provision means that for every $1 million in taxable gain, lessors will have additional cash of $400,000 to reinvest in their leasing business. For the typical lessor, this additional cash can generate increased ROI for their lease portfolio of 75 to 150 basis points. As a result, LKEs provide significant economic advantages and facilitate businesses ongoing or increasing investments in their businesses.
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