A Personal Property Exchange refers to the exchange of certain types of non-real estate personal property assets in a transaction that seeks to take advantage of Section 1031 of the U.S. Internal Revenue Code. This section allows investors to defer paying capital gains taxes when they sell an asset, as long as they use the proceeds to buy a “like-kind” asset within a specified period.
Traditionally, when people think of a 1031 exchange, they often think of real estate. However, the code does not only apply to real estate. It can also apply to certain personal property assets, under the right circumstances.
For an exchange of personal property to qualify for Section 1031:
- The property being sold and the property being acquired must be of “like-kind”. The definition of “like-kind” for personal property is more restrictive than for real estate. For example, a truck could be exchanged for another truck (same asset class) but not necessarily for office equipment.
- Both the relinquished and replacement properties must be held for productive use in a trade or business or for investment purposes. They cannot be primarily for personal use.
- All other 1031 exchange rules must be followed, such as the use of a qualified intermediary, the 45-day identification window, and the 180-day exchange period.
It’s worth noting that the Tax Cuts and Jobs Act of 2017 made significant changes to the applicability of 1031 exchanges. Starting from January 1, 2018, personal property is no longer eligible for a 1031 like-kind exchange. Only real property qualifies. Prior to this change, various types of personal property (e.g., aircraft, equipment, franchise licenses, etc.) might have been eligible for a 1031 exchange.
Given the dynamic nature of tax laws and regulations, it’s always a good idea to consult with a tax professional or legal counsel when considering any kind of 1031 exchange transaction.