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Drilling Into Money Not Boring by Mark E. Battersby Trade-Ins, Swaps, and Like-Kind Exchanges One area overlooked by lawmakers and the President-elect amongst the talk about changes, repeal or reform, allows the drilling operation to defer taxes using swaps, exchanges, and trade-ins. So-called “like-kind” exchanges involve swapping or trading one asset for another without receiving strictly cash on the transaction - or a large, immediate tax bill. Regardless of whether business or investment property is sold or disposed of, wherever there is a gain, there is tax on the gain. Fortunately, Section 1031 of the tax rules allows a drilling professional to post- pone paying tax on the gain if the proceeds are reinvested in similar property in a like-kind exchange. Remember however, gain in a like-kind exchange is only tax-deferred, not tax-free. Most exchanges must merely be of a “like-kind” although, under the surprisingly liberal rules, one business can even be exchanged for another. Again, there are traps for the unwary. First, both the property given up and the property received must have been held for investment or productive use in a trade or business. Vehicles, equipment, machinery, etc. used in a business all qualify. The second basic requirement is ob- vious: the property exchanged must be of like-kind. A good example is a truck for a truck. With real estate, the most popu- lar type of like-kind exchange, almost any ownership interest in real property exchanged for another interest in real property will qualify. Under the tax rules, a drilling busi- ness has 45 days from the date the prop- erty is rel inquished to identify a new property, and 180 days (from when the property is relinquished) to close on the replacement property. Many drilling professionals have dis- covered finding another party for an ex- change can be difficult. Fortunately, there’s an option: using a qualified exchange in- termediary and a deferred exchange. A deferred exchange is an exchange in which a drilling business transfers qualifying property and later receives re- placement property. If payment is received for the property being relinquished, it makes the transaction taxable. Instead, an intermediary is found to hold the pro- ceeds from the sale of the relinquished property and to use the amount to pur- chase the replacement property. While it usually makes sense to defer gains, a drilling operation suffering from a capital loss or having a bad year expect- ing little or no income might want to defer deductions. Seeking professional advice and help working through the numbers is always a good idea, especially with like- kind exchanges, trade-ins, and swaps. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 22 MARCH 2017 WorldWide Drilling Resource ®