Personal Property as a 1031 Exchange

While most 1031 exchanges involve real property, personal property may be exchanged as well. Personal property does not mean property used for personal gain because IRC 1031 requires all property, whether real or personal, to be used for business, trade or investment. Personal property refers to the asset’s nature and character. Examples of personal property that are exchanged include (but are not limited to) aircraft, heavy equipment and business assets.

The exchange requirements are the same for both real property and personal property. That said, unlike the broad definition of like-kind property for real property, it becomes more difficult to state when personal property is like-kind to other personal property. The difficulty stems from the many different ways to categorize personal property. Personal property may be characterized as depreciable tangible property, depreciable intangible property or non-depreciable personal property.

Depreciable tangible personal property

Depreciable tangible personal properties are considered like-kind if they are like-class; that is, exchanged properties must be in the same class. The classes are established in tax regulations as General Asset Class and Product Class. If the property may be classified within a General Asset Class, then it may not be re-classified into a Product Class.

Intangible and non-depreciable personal properties

Intangible and non-depreciable personal properties are exchanged for like-kind property (there are no "like-class" guidelines for these types of properties). The nature or character of the rights involved, as well as the nature or character of the underlying property to which the intangible personal property relates, determines whether the property is "like-kind." Items that fall under intangible and non-depreciable personal property include some patents, forms of software, coprights and trademarks.

Do you Qualify? Answer some basic questions to determine whether an exchange is right for you and your current situation.

"WASHINGTON STATE LAW, RCW 19.310.040, REQUIRES AN EXCHANGE FACILITATOR TO EITHER MAINTAIN A FIDELITY BOND IN AN AMOUNT OF NOT LESS THAN ONE MILLION DOLLARS THAT PROTECTS CLIENTS AGAINST LOSSES CAUSED BY CRIMINAL ACTS OF THE EXCHANGE FACILITATOR, OR HOLD ALL CLIENT FUNDS IN A QUALIFIED ESCROW ACCOUNT OR QUALIFIED TRUST." RCW 19.310.040(1)(b) (as amended)