Personal Property Exchanges

What are 1031 exchanges of personal property or business use assets?

Internal Revenue Code Section 1031 allows investors to exchange either like-kind real property or personal property for other like-kind real or personal property.  Depreciable tangible personal property eligible for exchange treatment includes such items as business use equipment, leased assets, and rental cars or equipment.

Although the rules for determining what is like-kind in a real estate exchange are fairly broad, the rules for determining what is like-kind for personal property items are more specific.  A taxpayer may receive tax deferral if the sale of personal property is exchanged for the purchase of personal property that falls within the same General Asset Class (GAC) or North American Industry Classification System (NAICS) classification. 

What are the general asset classes?

  1. Office furniture, fixtures, and equipment
  2. Information systems (computers)
  3. Data handling equipment, except computers
  4. Airplanes and helicopters
  5. Automobiles and taxis
  6. Buses
  7. Light general-purpose trucks
  8. Heavy general-purpose trucks
  9. Railroad cars and locomotives
  10. Tractor units for use over-the-road
  11. Trailers and trailer-mounted containers
  12. Vessels, barges, tugs, and similar water transportation equipment
  13. Industrial steam and electric generation and distribution systems

What items related to personal property sales are ineligible for 1031 exchange treatment?

Certain items that may be relevant to the sale transaction, such as goodwill, "covenants not to compete", and "inventory" do not qualify for tax deferral under IRC Section 1031. Thus, these items may not be attributed to the value of the sale for the exchange and the capital gain or loss must be recognized by the Exchanger.

What happens when an exchange involves both real and personal property?

There are many transactions that involve the sale of both real property and personal property, such as the sale of hotels, restaurants, and gas stations, wherein the taxpayer owns both the land and the personal property. The sale proceeds would be allocated as from real property or from personal property and the like-kind replacement properties would be acquired with the respective funds.

What are like-kind exchange programs?

Companies that perform multiple like-kind exchanges (LKEs) each year or that require a solution for managing more complex personal property exchanges may benefit from what is known as a master exchange program or a like-kind exchange program (LKE program).  Although Section 1031 is a seemingly simple provision, implementing an LKE program of depreciable assets can be complex. Bankers Escrow's parent company, Accruit, is the nation's leading provider of LKE programs.  Accruit is intimately involved with the establishment, maintenance and ongoing review of LKE programs, enabling efficient execution of valid high-volume exchanges of assets.  For more information, read about Accruit's LKE-Programs or contact us.

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