Tax

How to Defer Taxes on Sale of Business Equipment

written by Eric Lampe

Under Code Sec. 1031, a taxpayer can make a tax-free exchange of property held for productive use in a trade or business or for investment. The exchange must be made for other property that the taxpayer will continue to use in a trade or business or for investment. Ordinarily, the exchange is made directly with another taxpayer who holds like-kind property. For example, an investor in real estate may exchange a building with another person who also owns real estate for use in a trade or business or for investment. This is accomplished by most of us when trading in of an old vehicle or other machinery when purchasing new. When you trade in a vehicle, the vendor is in essence purchasing that vehicle from you in the form a trade in price. If you have held that vehicle for many years it has probably been fully depreciated, meaning that the entire trade in price is taxable. Code Sec. 1031 allows you to defer that gain from taxes and assigns the gain to the new asset.

Scenario: You have a company truck that you purchased 7 years ago. This item has been fully depreciated when you trade it in on a new truck. The dealership gives you $10,000 trade in price. Normally, when you sell that asset, you would pay taxes on $10,000, but since you traded it in, you pay no taxes on the $10,000 in the current year, and the $10,000 gain gets amortized over the life of the new truck. Another way to take advantage of Code Sec. 1031 is to make a deferred like-kind exchange, using a third person to facilitate the exchange. This can be advantageous when the taxpayer cannot find another holder of like-kind property to make a direct exchange with. The taxpayer identifies a third person to act as a qualified intermediary (QI) and enters into a legal agreement with them. The QI then acquires from the taxpayer the property that the taxpayer is relinquishing and sells the property to another person identified by the taxpayer. As part of the transaction, the QI acquires legal title to the property and transfers it to the person buying the property.

Please contact us if you have any questions about deferring taxes on business equipment 417-881-0145.

Tax Planning

View Similar Blogs

Other blogs about cybersecurity and your business

  • Istockphoto 184939771 612x612

    How to Minimize Tax Liability: Practical Strategies for Individuals and Businesses

    When it comes to financial planning, one of the most effective ways to protect your income and assets is by understanding how to minimize your tax liability. Whether you’re a business owner or an...
  • Congressional building on a bill

    Congress Passes Landmark Tax Legislation: What the New Bill Means for You

    On July 3, 2025, Congress passed the most sweeping tax legislation since 2017. Known unofficially as the One Big Beautiful Bill Act, this new reconciliation bill permanently extends key elements of...
  • Business owner calculating revenue

    Our Cost Accounting Services and How They Lead to Actionable Profit Strategies

    Do you understand how costs affect your business strategy? The Whitlock Co. leverages our cost accounting expertise to help you analyze expenses. We give you the data you need to make...