Introduction

Although the majority of exchanges under I.R.C. Section 1031 probably involve real property, the exchange of "personal property" is also possible and presents a substantial tax deferral opportunity for business owners.

"Personal property", for the purposes of 1031 exchanges, includes any tangible depreciable capital asset, other than real property, which is held for use in a trade or business or investment. In practice, these assets include all types of motor vehicles, aircraft, railroad stock, marine vessels, satellites, all types of equipment and livestock. As noted tax lawyer and exchange commentator Terence Floyd Cuff has noted, "If man can build it, it can be exchanged."

Certain types of intangible assets may also qualify for non recognition exchange treatment under Section 1031. These types of assets include franchise rights, intellectual property rights (patents, trademarks and copyrights) and television and radio licenses. However, the I.R.S. has taken the position that the goodwill of a business and covenants to compete do not qualify for non recognition treatment under Section 1031.

Personal Property Exchanges

The exchange of personal property assets under Section 1031 may be available for the sale of individual assets (e.g., a computer or vehicle), or the sale of a variety of assets at the same time (such as in a sale of all of the assets of a business). However, in both cases, to qualify for non recognition treatment under Section 1031, each item of personal property relinquished in the exchange must be determined to be "like kind" with the item of personal property received.

In a single asset exchange, the like kind requirement is usually met easily, with both the property relinquished and the property received being in the same "General Asset Class" or the same "Product Class". In Multiple Asset Exchanges, these same classifications are used to group assets and determine the recognition or non recognition of gain upon the sale.

General Asset Classes

The Regulations issued by the I.R.S. under Section 1031 introduced a "like class" safe harbor to determine whether items of depreciable tangible personal property were "like kind" to each other. Items of tangible personal property will be considered to be "like kind" if they are within the same General Asset Class. The Regulations established thirteen "General Asset Classes":

• Office furniture, fixtures and equipment
• Information systems, such as computers and peripheral equipment
• Non computer data handling equipment, such as copiers and typewriters
• Airplanes, helicopters, air frames and engines
• Automobiles
• Buses
• Light general purpose trucks
• Heavy general purpose trucks
• Over the road truck tractor units
• Trailers and trailer mounted containers
• Railroad cars and locomotives
• Vessels, barges, tugs and marine transportation equipment
• Industrial steam and electric generation and distribution systems

Product Classes

As an alternative to the "like class" test, items of personal property may be like kind if they are within the same "Product Class" established by the Standard Industrial Classification Codes published by the Office of Management and Budget. For example, all farm and garden machinery is within the same Product Class 3523 and therefore like kind.

The SIC Codes are complex and, unfortunately, their use to determine whether personal property is within the same Product Class has been confused by their replacement in 1997 with the North American Classification System Manual. It appears that the I.R.S. is following the old SIC Codes rather than the NACS Manual classifications to determine product classes, although no official position has been announced on this issue.

Personal Property Exchanges Outside of the Safe Harbor

Under the Regulations, personal property may be "like kind" even if it is not "like class" or within the same Product Class under the safe harbor. However, the like kind standard is less broad than for exchanges of real property, and requires properties to be of the same "nature or character", which is illustrated best by several examples:

• Copyrights of different novels
• Major league player contracts
• Bullion type (non currency) gold coins
• Livestock of the same sex
• FCC television licenses for FCC radio licenses
• Emission allowances allocated by the EPA
• Environmental impact mitigation credits

As noted, the I.R.S. has taken the position that the "goodwill" of a business (its existing business relationships that are expected to continue after a change in ownership) or its "going concern value" (the ability of the business to produce income after a change in ownership) are always inherently unique to the business and inseparable from it. Therefore, according to the I.R.S., the goodwill or going concern value of one business will never be like kind to the goodwill or going concern value of another business. (See I.R.S. Field Service Advice 199951006).

General and Identification Requirements

In addition to the more specific requirements discussed above, a delayed exchange of personal property must also comply with the general requirements of the Qualified Intermediary "safe harbor" provided by the Regulations, including the use of an independent third party as the Qualified Intermediary, time deadlines for the identification and receipt of replacement property, etc. The Regulations require that the identification of replacement property to be received in an exchange must specifically describe a particular type of personal property. For example, in an exchange of two automobiles, an unambiguous description of the replacement vehicle would describe the specific make, model and year of the automobile. The other general rules of identification under Section 1031 also apply to personal property exchanges.

Conclusion

National 1031 Exchange Service, LLC has a broad range of experience structuring 1031 exchanges of a variety of personal property assets, including business equipment, aircraft, vehicles, distribution rights and franchise rights, on a one-time or continuing basis. Please contact us if you have any questions regarding exchanges of any type of personal property.

NOT TO BE CONSTRUED TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY, ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.