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PLANES, TRAINS AND AUTOMOBILES

Internal Revenue Code Section 1031 allows investors to exchange either like-kind real or personal property for other like-kind real or personal property. Although the rules for like-kind real estate are fairly broad, the rules to exchange personal property for like-kind or like-class specify that a taxpayer can only receive tax deferral if the sale of personal property is exchanged for the purchase of personal property that falls within the same Product Class or General Asset Class. Product and General Asset Classes, as described in the North American Standard Industrial Classification (NASIC) Manual, were developed for use in the classification of establishments and products by the type of activity for which they are engaged. Depreciable tangible personal property is exchanged for property of like-kind if it is exchanged for property of like-class.

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.

UNEXCHANGEABLE ITEMS

Another aspect of personal property exchanges that differs from real property exchanges is that certain items of 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 taxpayer.

MIXED EXCHANGES

There are also 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. In this case, the taxpayer can allocate the proceeds specifically for real property and personal property and purchase like-kind property with the respective funds. In a complex combined real and personal property exchange, it is important to maximize potential tax deferral benefits in advance. Asset Preservation, Inc. encourages taxpayer to always work closely with an accountant or attorney to ensure that the transaction is structured properly.

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