Exchanging Personal Property Via Section 1031 of the Tax Code

Although the vast majority of #1031 exchanges involve real estate, the #tax code does permit the exchange of personal property, too. Of course, the personal property still has to adhere to the stringent requirements of section 1031. That means the personal property has to be used for business, trade or investment.

So how do you determine if the personal property you want to exchange qualifies? It starts with a determination of the asset’s nature and character, because just like with real property, the things you want to exchange must be like-kind. But unlike the relatively broad definition of like-kind for real property, when it comes to personal property the comparison becomes slightly more precise.

The first step is characterizing the personal property. It can be one of three things: depreciable tangible property, depreciable intangible property or non-depreciable personal property. Determining the category will determine how to identify whether the properties in question are like-kind.

Depreciable Tangible Personal Property

These types of properties are considered like-kind if they are like-class. You determine a property’s class via either General Asset Class or Product Class, both defined within the tax regulations themselves. However, be careful. If a property falls within a General Asset Class, it cannot thereafter be re-classified into a Product Class.

Intangible & Non-Depreciable Personal Property

Unlike depreciable tangible personal property, intangible and non-depreciable personal properties do not have like-class guidance. For these types of properties (e.g. patents, copyrights, trademarks, etc.), a different approach is required. One must look to the nature of the rights involved, and the character and nature of the underlying property to which the intangible property relates. A comparison then determines whether the exchanged properties are like-kind.

Due to the potentially complex nature of personal property 1031 exchanges, seeking professional guidance before proceeding is a wise move. Advisors experienced with personal property exchanges can save you a lot of IRS-related headaches down the road.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.