Can you trade your airplane or boat in a 1031 exchange?

While most investors are familiar with the use of a #1031 exchange for structured real estate transactions, not many understand that an exchange can also be done on certain personal property. It is a mistake for investors to overlook personal property exchanges. Why? Because selling personal property that could have been exchanged means you’ve missed out on an excellent opportunities for additional tax deferral treatment.

But in order to fully reap the benefits of personal property exchanges, you have to understand the limitations. Personal property does not mean your individual belongings or personal use assets. So forget that collection of antique glassware gathering dust in the attic. The only personal property that qualifies is non-real estate assets that you’ve used for productive use in your business or for investment. So think things like expensive artwork, corporate airplanes and commercial fishing boats.

So if you’ve determined you have some legitimate personal property to exchange, the next question might be why should I exchange instead of sell? That one’s easy. The primary benefit of exchanging personal property is the deferral of the recapture tax on depreciation you’ve previously deducted. Since personal property depreciates faster than real estate, avoiding recaptured depreciation can be quite beneficial.

Ok. So a personal property exchange is right for you. Great, so how do you proceed? Just like a regular exchange, except for one key difference – identifying “like-kind” property is much stricter than with real estate. Tangible depreciable personal property assets must share the same nature and character or be included within the same General Asset Class (set forth in Rev. Proc. 87-56). For non-depreciable assets, the nature or character of the property will be scrutinized.

If you think a personal property 1031 exchange might be right for you, it is important to discuss the options with your experienced tax advisors. They can help you decide when and if to execute an exchange.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.