Personal Property Exchanges

October 19, 2009 · Ron Ricard - Investment Property Exchange Services, Inc

Personal Property Exchanges – The Other Side of Section 1031

Many Taxpayers are familiar with §1031 exchanges of real estate. What many people do not know is that section 1031 applies equally to the exchange of personal property. Taxpayers that sell personal property used in a trade or business or held for investment may miss a valuable opportunity to defer the tax gain on the sale if they do not consider like kind exchange treatment for their transaction.

Typically, gain on the sale of personal property, such as machinery and equipment, comes only from depreciation recapture. Even though the used asset is worth considerably less than the original purchase price, the tax on the amount subject to recapture can be substantial. Recapture on personal property is taxed at ordinary income tax rates which are considerably higher than capital gains rates. Thus, if the fair market value of the relinquished personal property asset is greater than its adjusted basis (cost of the asset minus depreciation allowed), a gain will be realized, and it makes good sense to consider a tax deferred exchange.

The rules for exchanges of personal property are the same as those for real property. The “like-kind” requirement, however, is a bit more challenging for personal property. To qualify for exchange treatment, the relinquished and replacement assets must be either “like-kind” or “like-class.” “Like-kind” refers to assets that are the same, such as an airplane for an airplane, or a backhoe for a backhoe. “Like-class” refers to tangible, depreciable personal property that falls within the same General Asset Class or within the same Product Class. Your tax advisor can assist you with determining what exactly qualifies as “like kind” or “like class” under §1031.

Ron Ricard – Investment Property Exchange Service

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Filed Under Real Estate Finance, Real Estate for Buyers and Sellers

Tags: 1031 exchanges, personal property exchanges, Prudential California Realty, Prudential California Realty San Bruno, Ron Ricard, tax defered exchanges

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Comments

2 Responses to “Personal Property Exchanges”

Brian Boisson on October 20th, 2009 8:56 am

Ron,

Very interesting information!

Again, I learn something new!

Thank you for contributing to PruCalVoices!

Brian Boisson
Shokoofeh Nowbakht on November 4th, 2009 1:21 am

Ron,
You’re right, many don’t think about the 1031 in exchange of the personal properties. Great information.
Thanks,
Shokoofeh Nowbakht
http://www.shokoo.com