In 2017’s tax reform act, personal property was excluded from 1031 treatment. If you are selling a business or other personal property triggering gain, consider a Qualified Opportunity Fund (“QOZ”, “OZ” or “QOF”) which may offer tax benefits. You may also be able to alleviate some of the tax burden if replacing the asset with new by expensing the purchase. Talk to your tax advisor for more information.
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.