In many deferred exchanges, a qualified intermediary is used to transfer the properties and accomplish the like-kind exchange requirements such as the 45-day property identification rule and the 180-day closing rule that must be complied with exactly. There are also rules for qualified intermediary. The qualified intermediary cannot, for example, be a related party to the person making the exchange.
As part of its ongoing support of woodworking technical education, Castle Inc. has donated TSM- 21 pocket cutting machines to the WoodLINKS program at Buckeye High School in Phoenix, and Albemarle High School in Albemarle, N.C.
The TSM- 21 cuts pockets into panels to assist in the assembly of drawer boxes, case construction, face-frame cabinetry and custom woodworking projects.
Castle has established a “Fortify Your School” program to support technical education in woodworking throughout the United States.
dan Dr., Clarence, NY 14031-1490. Tel: 716-631-0100. www.dynabrade.com
While like-kind exchanges offer many tax benefits, there can also be potential pitfalls. One mistake that can prove quite costly is a misunderstanding of the 180-day rule. That rule refers to 180 days to close the deal or the earlier of the due date of the tax return. Fortunately, woodworking businesses can get an extension of time to file the return just to take advantage of the full 180 days and still comply with the rule.
A major downside of 1031 exchanges is the replacement property’s reduced tax basis or book value. A significantly smaller depreciation write-off or a reduced valuation of business assets can hurt any woodworking operation’s financial picture. Finding replacement property at a good price is often difficult and compounded by the tight timelines.
Still another problem for many professional woodworkers is matching equity, the requirement for reinvesting the entire proceeds. The rules allow a shop owner to identify up to three replacement properties or any number of replacement properties provided the aggregate value of each does not exceed 20 percent of the aggregate value of all relinquished properties.
In fact, woodworking business owners who have significant capital loss carryovers might prefer not to defer the gain in a like-kind exchange. Generally, like-kind exchange treatment should not be used for any property that will generate a loss, as a like-kind exchange also defers any loss.
It should be obvious by now that like-kind exchanges, under Section 1031 of the tax law, can be an extremely valuable tool for every woodworking business owner wishing to defer or postpone taxes. Also keep in mind that a great deal of every Section 1031 exchange is “form” driven. Thus, it is important to have an advisor who can ensure deadlines are met.
A qualified advisor can also perform the calculations necessary to determine the value, debt and equity requirements for both the relinquished property and the replacement property so important for deferring the entire gain. That professional might also serve as a qualified intermediary, helping smooth the path of the Section 1031, like-kind exchange or swap. Again, however, the time to think about like-kind exchanges is now — not at tax time.
Dynabrade, a manufacturer of pneumatic sanders and polishers, has published a new 50-page product catalog targeting the kitchen, bath and furniture industries. It also features the company’s abrasives and sanding accessories.
Contact: Dynabrade Inc. 8989 Sheri-
Westlund Distributing offers its new 2006-2007 Cabinetmaker’s Supply Catalog, featuring 300 pages of cabinetmaking supplies such as edgebanding, decorative hardware, hinges, drawer slides, abrasives, adhesives, fasteners, tools and safety products.
For a free copy, call 800-325-6878 or visit www.westlunddistributing.com.
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Mark E. Battersby is a tax and financial writer, columnist and author with offices in Ardmore, Pennsylvania.
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