Personal Property Exchanges

Under Section 1031, exchangers may defer capital gains taxes on the sale of personal property, as opposed to real property, by exchanging into other “like-kind” property.  The personal property must be held for investment purposes or for use in a trade or business.  An exchange of personal property may be desirable because it has been fully depreciated and its sale price exceeds the tax basis.  In the case of business swaps involving real estate, personal property may be associated with the exchange.  In order to avoid taxable gain on personal property in business swaps, it may be desirable to exchange fully depreciated personal property.  Swaps of apartment complexes and buildings may involve similar considerations.

The definition of “like-kind” property, for personal property purposes, is much more restrictive and is generally limited to assets that are like in class.  Examples of exchanges of “like-class” properties include exchanging cars for cars, tractor units for over the road with other tractors, buses for buses, trailers for other trailers or trailer-mounted containers, airplanes for airplanes, etc.  Classes that may be exchanged for each other are determined based upon the North American Industry Classification System (“NAICS”).  Intangible and non-depreciable property may also be exchanged.  Examples include copyrights, patents, collectables and art.  An ultimate determination as to whether personal property is like-class must be addressed prior to the transaction.  All exchanges of personal property involve many of the same time limitations and restrictions as exchanges involving real property.