There has been a significant increase in the number of personal property 1031 Exchange transactions over the last decade, as individuals, small businesses and corporations alike learn more about the income tax benefits of this powerful tax-deferral strategy under Section 1031 of the Internal Revenue Code.
The vast majority of 1031 Exchanges involve real estate. It is estimated that 1031 Exchanges of personal property account for less than 3% of the total transaction volume. However, research indicates that the growth in personal property 1031 Exchanges will be significant over the next decade as more taxpayers become aware of the opportunity available to them.
A personal property 1031 Exchange allows an individual, small business or institutional taxpayer to sell existing personal property (relinquished property) and purchase more profitable and/or productive personal property (like-kind replacement property) while deferring Federal, and in most cases state, depreciation recapture and capital gain income taxes.
Taxpayers often view personal property as assets that do not appreciate in value and therefore have no taxable gain to worry about. However, personal property held for investment or used in a trade or business is typically depreciated for book value purposes and thereby creates a taxable gain upon sale for book and tax purposes. This gain can be deferred using the personal property 1031 Exchange.
Personal property 1031 Exchanges often include, but are certainly not limited to, exchanges of:
Intangible personal property 1031 Exchanges can involve assets such as:
Personal property or assets of a business operation can be structured as a 1031 Exchange when you sell the assets of your business. Multi-asset 1031 Exchanges often include both personal property and real estate and are a popular income tax planning strategy used by individuals, small businesses, and large corporations.
1031 Exchange transactions involving significant quantities of personal property, such as fleets of rental cars or railroad rolling stock have become known as LKE Program Exchanges, and are complex income tax transactions that always involve multiple assets and multiple 1031 Exchange transactions with significant LKE Program Exchange documentation pursuant to a master LKE Program Exchange Structure.
1031 Exchange transactions involving personal property must comply with all of the normal requirements and guidelines for structuring tax-deferred exchange transactions outlined in Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations, including compliance with the strict deadlines for the identification of replacement property and completion of the 1031 Exchange. The following guidelines are specific to 1031 Exchanges of personal property.
Qualified Use Personal Property
You must have held the relinquished personal property for rental, investment or use in your trade or business, and must have the intent to hold the like-kind replacement personal property for rental, investment or use in his business. Personal property not held for rental, investment or use in your trade or business is not considered to be qualified use personal property and will not qualify for 1031 Exchange treatment.
Tangible and Intangible Personal Property
Personal property can be tangible or intangible personal property. Tangible depreciable personal property can include airplanes or aircraft, vessels or boats, cars or automobiles, trucks, fleets of cars or trucks, and machinery or equipment. Intangible personal property may include internet domain names or URLs, franchise agreements, patents, copyrights, liquor licenses, and radio or TV frequency licenses, just to name a few.
Like Kind or Like Class Personal Property
Personal property must be of like-kind or like-class in order to qualify for tax-deferred exchange treatment under Section 1031. Personal property must fall within the same General Asset Class or Product Class to be considered like-class. Product classes are outlined within the North American Industry Classification System (NAICS) tables.
Personal property that does not fall within either a General Asset Class or a Product Class may still qualify for tax-deferred exchange treatment as long as the relinquished property and the replacement property are like-kind to each other.