Personal property refers to assets other than real estate that can potentially be exchanged for tax deferral benefits. Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of certain types of property, primarily real estate. However, personal property can also qualify for a 1031 exchange under certain conditions.
Personal property in this context does not refer to personal-use items like one’s primary residence or personal vehicles. Instead, it means business or investment assets such as equipment, machinery, vehicles used for business, leasehold interests with a remaining term of 30 years or more (including renewal options), and other tangible assets used in a trade or business or held for investment.
To qualify for a 1031 exchange with personal property:
- Like-kind requirement: The exchanged personal property must be “like-kind” to the property received in return. The definition of “like-kind” for personal property is stricter than for real estate. Items within the same General Asset Class or Product Class, as defined by the North American Industry Classification System (NAICS), are typically considered like-kind.
- Held for productive use or investment: The exchanged personal property must have been held for productive use in a trade or business or for investment. It cannot be held primarily for sale.
- Exchange timeline and intermediary requirements: Like with real property, personal property exchanges typically require the use of a qualified intermediary to facilitate the transaction and adhere to specific timelines (e.g., the 45-day identification period and the 180-day exchange period).
It’s important to note that with the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, personal property exchanges were largely eliminated from Section 1031, leaving real estate as the primary asset eligible for this tax deferral treatment. However, personal property exchanges that took place before the implementation of this tax reform can still be relevant in historical contexts or in understanding the broader scope of 1031 exchanges before the change.