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Overview of Personal Property 1031 Exchanges

Tax Cuts and Jobs Act of 2017 (TCJA)

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the ability for taxpayers to defer the payment of any taxes realized from the sale of personal property through a tax-deferred exchange at the Federal level.  Most states generally conform to the Federal treatment of tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code ("1031 Exchange"). 

California Still Allows Personal Property 1031 Exchanges

The State of California is not necessarily one of those states.  California conforms to Section 1031 of the Internal Revenue Code as it was on January 1, 2015 and has not conformed to the changes contained in the Tax Cuts and Jobs Act of 2017 (TCJA) relating to 1031 Exchanges.

Advantages of a Personal Property 1031 Exchange

A Personal Property 1031 Exchange allows an individual, business or institutional taxpayer to sell existing personal property (relinquished property) and purchase more profitable and/or productive personal property (replacement property) while deferring taxes that would otherwise be due to California.

Overview of Personal Property 1031 Exchanges

Personal Property 1031 Exchanges often include, but are certainly not limited to, exchanges of:

  • corporate aircraft
  • commercial aircraft
  • aircraft engines
  • aviation related equipment
  • shipping vessels
  • railroad rolling stock
  • automobile fleets
  • trucks
  • trucking equipment
  • livestock
  • paintings
  • art work

Intangible Personal Property 1031 Exchanges can involve assets such as:

  • radio and television broadcasting licenses
  • taxi medallions
  • sports team franchises
  • copyrights
  • trademarks
  • internet domain names
  • URL addresses
  • Beer and alcohol distribution rights
  • fast food franchise licenses

Sale of Business Operations or Personal Property

Personal property or assets of a business operation can be structured as a 1031 Exchange when you sell the assets of your business.  Multi-asset 1031 Exchanges often include both personal property and real estate and are a popular income tax planning strategy used by individuals, businesses, and institutions. 

LKE Program 1031 Exchanges of Personal Property

1031 Exchange transactions involving significant quantities of personal property, such as fleets of rental cars or railroad rolling stock have become known as LKE Program Exchanges, and are complex income tax transactions that always involve multiple assets and multiple 1031 Exchange transactions with significant LKE Program Exchange documentation pursuant to a master LKE Program Exchange structure.

Basic Rules and Requirements for Personal Property 1031 Exchanges

1031 Exchange transactions involving personal property must comply with all of the normal requirements and guidelines for structuring tax-deferred exchange transactions outlined in Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations, including compliance with the strict deadlines for the identification of replacement property and completion of the 1031 Exchange.   The following guidelines are specific to 1031 Exchanges of personal property. 

Qualified Use Personal Property

You must have held the relinquished personal property for rental, investment or use in your trade or business, and must have the intent to hold the like-kind replacement personal property for rental, investment or use in his business.  Personal property not held for rental, investment or use in your trade or business is not considered to be qualified use personal property and will not qualify for 1031 Exchange treatment. 

Tangible and Intangible Personal Property

Personal property can be tangible or intangible personal property.  Tangible depreciable personal property can include airplanes or aircraft, vessels or boats, cars or automobiles, trucks, fleets of cars or trucks, and machinery or equipment.  Intangible personal property may include internet domain names or URL's, franchise agreements, patents, copyrights, liquor licenses, and radio or TV frequency licenses, just to name a few. 

Like Kind or Like Class Personal Property

Personal property must be of like-kind or like-class in order to qualify for tax-deferred exchange treatment under Section 1031.  Personal property must fall within the same General Asset Class or Product Class to be considered like-class.  Product classes are outlined within the North American Industry Classification System (NAICS) tables. 

Personal property that does not fall within either a General Asset Class or a Product Class may still qualify for tax-deferred exchange treatment as long as the relinquished property and the replacement property are considered to be like-kind to each other. 

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