PERSONAL PROPERTY EXCHANGE QUESTIONS AND ANSWERS
What kinds of property can be exchanged?
Property held for productive use in a trade or business or for investment can be exchanged for property which is like kind and held for productive use in a trade or business or for investment, In the case of the business exchange, the exchange will usually include personal property and might include real estate.
How is a business exchanged?
A business sale, like any other transaction, will include the transfer of property from one person or entity to another. As in all other exchanges, an intermediary is substituted to sell the relinquished property, receive the proceeds and use the proceeds to acquire replacement like-kind property.
How is like-kind property defined?
All real property which is held for productive use or for investment will be like kind to all other real property. Personal property is much more difficult to define. Making a match can be difficult, because the value of types of property can vary within two businesses which have the same value.
How can personal property be determined to be like-kind?
There are three ways to define like-kind personal property: Asset lasses, Product Classes and a specific match. Some property is too unique so not like kind to any other or is ineligible.
Asset Classes: Reg. §1.1031(a)-2(b)(2)(i)-(xiii) which went into a final form in April 1991, created thirteen asset classes. Any property in a class will be like kind to all other property in the class. Classes include; office furniture, fixtures and equipment; information systems (computers and peripheral equipment); automobiles and taxis; classes for light and heavy general purpose trucks, tractor units, trailers; etc.
Product Classes: Reg. §1.1031(a)-2 includes regulations which adopt a four digit coding system for depreciable, tangible personal property. This code is from Division D of the Standard Industrial Classification (SIC) codes.
A requirement for identical property will occur if there is non-depreciable and intangible properties. Gold bullion is like kind to gold coins but not to silver bullion. Radio broadcast rights must be exchanged for similar property. Farm animals must be exchanged for the same kind of animal and it must be the same sex.
What kinds of personal property are not like kind under I.R.C. §1031?
Goodwill is not like kind to any other goodwill or going concern value. Inventory or other property held primarily for sale is not like kind to other personal property, even if property is inventory.
How is a business transferred?
The business will be transferred by a bill of sale if the property is solely personal property or by a deed for the real property and a bill of sale for the purposes of the personal property. Titled property, such as motor vehicles, boats, planes, etc., will need to go through a title transfer.
The transfers may be directly between the owner of the business and the purchaser without going through the exchange accommodator.
Will an exchange of a business be tax free?
It will be difficult to match the values of all classes. Each class of relinquished property will contain certain property of a certain depreciated value (and there are no exceptions to listing the properties no matter how small the value). The replacement class may include identical property but if it does not, there can be a problem with boot even though there is a total value for the business which meets or exceeds the total value exchanged from.
How is debt attributed to an exchange?
The real property has attached to it security documents such as a Trust Deed which secures a note. The normal personal property security document is called a financing statement although there are other forms of personal property security documents. Because the classes will have different values, the relief of debt from a class will be complicated by values of the replacement properties in the same class. In addition, since personal property depreciates, the depreciated values in some classes will be less than the debt attributed to them and the depreciated values in other classes will be greater than the debt attributed to them. This is partly resolved by dividing remaining debt against classes with excess value.