Section 1031 Exchange for Aircraft: What Changed and What Still Works

Does Section 1031 still apply to aircraft trades?

No. The 2017 Tax Cuts and Jobs Act amended IRC §1031(a)(1) to restrict like-kind exchange treatment to real property only, effective for exchanges completed after December 31, 2017. Aircraft, which had been the second-most-common §1031 asset class behind real estate, were eliminated along with all other personal property: equipment, vehicles, livestock, artwork, and intangibles.

Before TCJA, an owner could trade a Citation X for a Global 5000, defer the entire built-in gain, and carry over basis to the replacement aircraft. That structure is dead. Any disposition of an aircraft after 2017 — whether a sale, a trade-in to an OEM, or a swap with another operator — is a fully taxable event. The seller recognizes gain equal to the amount realized (cash plus trade credit plus debt relief) minus adjusted basis.

For aircraft that have been fully depreciated under §168(k) bonus depreciation, this is almost always ordinary income recapture under §1245, not capital gain. A $20M jet written down to zero basis and traded for $12M of credit produces $12M of ordinary income at the owner's marginal rate — call it $4.4M of federal tax at 37%, plus state.

What replaced §1031 as the offset strategy?

Bonus depreciation under IRC §168(k) became the primary offset, and it was the explicit trade Congress made in TCJA. Lawmakers killed §1031 for personal property and simultaneously expanded §168(k) to allow 100% first-year expensing on both new and used aircraft acquired and placed in service after September 27, 2017. The pairing was intentional: the depreciation deduction on the replacement aircraft was designed to wash against the recapture on the relinquished one.

That works cleanly when bonus is at 100%. It works less cleanly now. The 168(k) percentage stepped down to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027 absent legislative action. The OBBBA and various 2024–2025 extender bills have proposed restoring 100% bonus for business aircraft; as of this writing, the phaseout remains the statutory baseline.

The arithmetic matters. An owner trading in 2025 at 40% bonus who recognizes $12M of recapture and acquires a $20M replacement gets only $8M of bonus deduction in year one. The remaining $12M depreciates on the seven-year MACRS schedule for Part 91 aircraft (five-year for Part 135). The taxpayer is cash-flow negative on the swap until the regular MACRS catches up — a problem §1031 never created.

Can you structure around the §1031 repeal?

Not directly, but a few mechanics still help. The first is timing: close the disposition and the acquisition in the same tax year so the recapture and the bonus deduction fall on the same return. A December sale and a January purchase splits them across years and can trigger AMT or limitation issues under §461(l) excess business loss rules.

The second is qualified business use. To claim §168(k) at all, the aircraft must meet the §280F(b) more-than-50% qualified business use test. Entertainment flights under §274 do not count toward qualified use and trigger disallowed deductions on top. Owners who flunk the 50% test get straight-line ADS depreciation over 12 years instead of accelerated MACRS — a catastrophic outcome when paired with recapture from the relinquished aircraft.

The third is the §1031 real-property carveout for hangars. The land, hangar, and FBO improvements an owner holds for business still qualify for like-kind exchange under the post-TCJA §1031. An owner selling a hangar at Van Nuys and acquiring one at Scottsdale can defer that gain. The aircraft inside the hangar cannot ride along.

What about fractional shares and jet cards?

Fractional shares are personal property and are subject to the same §1031 repeal. A NetJets or Flexjet owner exiting a share at a gain recognizes that gain in full; rolling proceeds into a larger share or a different program does not defer anything. The fractional providers' contracts are explicit that the buyback is a taxable disposition.

Jet cards and prepaid charter blocks are not depreciable assets in the first place — they are prepaid services under §461. There is no §1031 question because there was never a basis to exchange. Unused card hours that are forfeited or expired are simply deductible as ordinary business expense in the year of forfeiture, assuming the underlying flights would have qualified under §274.

How does the IRS audit a post-2017 aircraft trade?

Aggressively. Aircraft transactions sit on the IRS's Large Business & International division audit radar, and the Service has issued multiple Industry Director Directives focused on §274 entertainment disallowance and §168(k) qualified business use. A trade-up in the bonus phaseout era is a flashing target because the deduction is large, the recapture is large, and the documentation burden is high.

Expect the examiner to demand contemporaneous flight logs for every leg on both the relinquished and replacement aircraft, passenger manifests identifying each occupant and their business relationship, board minutes or corporate resolutions authorizing the acquisition, and a business-purpose memo for each entertainment-adjacent flight. The §280F qualified business use percentage is recomputed annually; failing the 50% test in any year after placed-in-service triggers recapture of prior bonus depreciation under §280F(b)(2).

Owners who structured pre-2018 §1031 exchanges and carried over low basis into a current aircraft also remain exposed. When that aircraft sells, the deferred gain from the original exchange comes due, plus any bonus depreciation claimed in the interim. The §1031 deferral was never forgiveness — it was a clock, and the clock stops at sale.

Is §1031 coming back for aircraft?

Probably not. Every serious tax-reform proposal since 2017, including the Ways and Means drafts circulating in 2024 and 2025, has left the personal-property §1031 repeal intact while debating bonus depreciation restoration. The political economy is clear: §1031 for aircraft was viewed in 2017 as a private-jet subsidy and was killed deliberately. Bonus depreciation polls better because it applies to manufacturing equipment broadly.

The planning posture for the next acquisition cycle should assume §1031 is gone permanently, that bonus depreciation may or may not be restored to 100%, and that the only reliable lever is rigorous §280F qualified business use documentation paired with disciplined transaction timing.