In order to complete a Section 1031 Exchange, both the relinquished property and the replacement property must qualify as ‘like-kind’ pursuant to the guidelines set forth in the IRS regulations. 

Like-kind exchanges are an effective investment strategy for many categories of personal property, including but not limited to aircraft, vessels, and intangible personal property such as licenses or franchises.  While the like-kind requirement for real property is fairly easily satisfied, the rules are more rigorous for personal property exchanges.  The regulations state that tangible personal property will meet the like-kind requirement if both the relinquished and replacement properties are of the same general asset class or the same product class.  In addition, the requirement can be met if the assets are deemed to be of like kind under general principles. 

 

Same General Asset Classes

 

Properties are of like class if they are within the same General Asset Class described in asset classes 00.11 through 00.28 and 00.4 of IRS Revenue Procedure 87-56 as supplemented.  This IRS document classifies properties for depreciation purposes and groups various sorts of tangible personal property in a series of General Asset Classes.  For example, office furniture, fixtures and equipment are included in one General Asset Class while vessels and barges grouped in another General Asset Class. Similarly, all automobiles fall into the same General Asset Class and light trucks form a separate Class. 

 

Same Product Classes

 

Properties are also of like class (and therefore satisfy the like-kind requirement) if they fall within the same "Product Class." However, the like-kind requirement may not be satisfied by reference to Product Class if the properties are set forth in a General Asset Class.  The Product Class status of property not listed in a General Asset Class is determined by referring to the 6-digit product class within Sectors 31, 32 and 33 of the North American Industrial Classification System ("NAICS").

 

 

Like-Kind Determination for Other Assets

 

Certain assets such as intangible personal property do not belong to either a General Asset Class or a Product Class. Such property may, nonetheless, satisfy the like-kind requirement.  Under the regulations, the determination of whether non-classified property is generally of like-kind is made based on all of the facts and circumstances. IRS Reg. § 1.1031(a)-2(c)(1). 

 

The regulations specifically state that no reference is to be drawn from the fact that personal property assets are not of like class in determining whether or not they are like-kind for 1031 Exchange proposes.  Assets that are different in ‘grade or quality’ may nevertheless be considered to be like-kind, while assets that are different in ‘nature and character’ generally are not considered to be like-kind.

 

The facts and circumstances test will also apply if one asset is described in the General Asset Class and the other asset is found in the Product Class. 

 

 

Foreign Use Property

 

Personal property used predominantly within the US is not considered like-kind with personal property used predominantly outside the US.  If you have assets that may be affected by these rules, please contact us.

 

 

Summary

 

Tangible personal property is of like-kind if the relinquished and replacement assets are of the same General Asset Class or the same Product Class.  Assets that are not included in these classes, such as intangible assets, may nevertheless be considered as like-kind for Section 1031 exchange purposes. 

 

We invite you to contact us if we can provide any additional information for you regarding the like-kind requirements for personal property.