1031 Exchanges: For More Than Just Real Estate
For many non-professional investors, #1031 exchanges are used primarily for real estate transactions. However, the IRS code also allows for a variety of personal property to qualify, too. In fact, personal property exchanges are just as common as real property exchanges.
Where it gets complicated, though, is application of the “like-kind” rules. The IRS regulations establish safe harbor definitions related to like-kind personal property. The key is that the replacement property must be within the same General Asset Class or Product Class.
There are thirteen General Asset Classes specified in section Section 1.1031(a)-2(b)(2) of IRS regulations:
- Office furniture, fixtures and equipment
- Information systems
- Data handling equipment, except computers
- Airplanes, except those used in commercial or contract carrying of passengers or freight, and all helicopters
- Automobiles and taxis
- Buses
- Light general-purpose trucks
- Heavy general-purpose trucks
- Railroad cars and locomotives, except those owned by railroad companies
- Tractor units for use over-the-road
- Trailers and trailer-mounted containers
- Vessels, barges, tugs and similar water-transportation equipment
- Industrial steam and electric generation and/or distribution systems
IRS regulation, section 1.1031(a)-2(b)(3) ties product classes for valid 1031 exchanges to the North American Industry Classification System (NAICS). Although these classes are broad, only the Product Classes involving the manufacturing sector (six digit codes beginning with 31, 32 and 33) are included. By incorporating certain Product Codes into the 1031 framework, assets that do not fall within a General Asset Class can still be part of a valid 1031 exchange.
Because of the complexity of personal property exchanges under section 1031, it is imperative to consult with a tax professional to ensure the integrity and success of such transactions.
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