August 17, 2017 by J. Quentin Murray

How to Save Money on Used Machine Tools With a 1031 Exchange

Let's not beat around the bush here, machines cost a lot of money. Anyone in the business of machining knows that even a used machine is still going to run them a lot of money, so it's important to take advantage of anything that can help save an extra buck. Last week we went over the section 179 tax deduction, and this week we're going to take a look at another little quirk of tax law that can save you a ton: the section 1031 like-kind exchange.

The gist of the law is this: whenever you sell any business property, the gains are taxable. When it comes to machinery, these gains could be a lot. However, using the 1031 like-kind exchange, you can spend the money gained from the sale on another similar property, tax free. Like-kind is broad as well, so just about any machine tool can be exchanged for another. Here are the main ways a 1031 like-kind exchange are used:

Direct Exchange

This is the simplest type of like-kind exchange. In the direct exchange one party simply gives the other one piece of property for another. The logistics of this type are trickier than the taxes. Unless you have a particularly dense network, odds are you aren't going to find another machinist looking to exchange the exact machine you're looking for for the one you're trying to get rid of. If you do run into the situation, though, know that it is covered by 1031. If not though...

This is the simplest type of like-kind exchange. In the direct exchange one party simply exchanges one piece of property for another. The logistics of this type are trickier than the taxes. Unless you have a particularly dense network, odds are you aren't going to find another machinist looking to exchange the exact machine you're looking for the one you're trying to get rid of. If you do run into the situation, though, know that it is covered by 1031. If not though...

Deferred Exchange

Most people don't have a trading partnered lined up the moment they're ready to sell a machine, so the deferred exchange tends to be the most common type. In the deferred exchange, you "sell" your machine, then use a middleman to hold the profits and "buy" a new property for you. Now, you can't just sit on that money forever; within 45 days of the initial sale you'll have to designate a replacement property. Due to the uncertainty of these things, especially with larger machines or real estate, you can declare multiple replacements so long as you close on one within 180 days.

There are nuances to the law that can't be covered in a short blog post, so make sure you check out the full rundown on the IRS website before attempting a 1031 exchange yourself, but this rundown should give you everything you need to know if the like-kind exchange is right for you.

If you're looking to buy used machinery eligible for the 1031 like-kind exchange, consider checking out Machine Tool Bids' large catalog of used machinery.

 VIEW ALL MACHINES >>

Recent Posts

Follow me on Twitter