Like kind exchange examples represent the variety of real and personal property eligible for Internal Revenue Code (IRC) Section 1031 tax deferred exchanges. Nearly every week I am surprised by those not familiar with the fact that tangible and intangible personal property held for productive use in a trade, business or for investment qualify for the capital gains tax deferral strategy. Like kind examples range from livestock, gold bullion, business aircraft and equipment to any type of real property.
Proper Intent
IRC Section 1031 allows US taxpayers to initiate a 1031 exchange to defer federal, state and local capital gain recaptured depreciation taxes when property held in the productive use of a trade, business or for investment is exchanged solely for like kind property held in the productive use of a trade, business or for investment. Real property is the typical like kind exchange example taxpayers and professional advisors consider, such as land, vacation or single family rentals. Any real property in the US is considered like kind to any real property in the US. Oil and gas royalties, water rights, tenants in common or fractional ownership of a commercial property qualify as like kind exchange examples.
Real property held for the proper 1031 intent of holding for productive use in a trade, business or for investment rather than a flip, even in foreign countries exchanged for real property outside the US, is eligible for tax deferral given the titleholder is subject to US capital gains taxes.
Personal Property
Like kind exchange examples of personal property include equipment used, sold and replaced, either one at a time or at auction. Like kind exchange examples include highway construction, milling, mining and sawmill equipment, companies that lay pipe line and drill for oil and gas, business aircraft, rental cars and trucks, TV and radio licenses, hospital equipment, vintage cars, heirloom musical instruments used by chamber musicians, gold and silver bullion and prize winning bulls. The list of tangible personal property includes furniture, railcars, trucks, buses and cars, locomotives, ships and barges. Any type of tangible personal property held for the proper intent is eligible for tax deferral given the equipment is replaced with like-kind property. This means the property must be replaced with like class or like asset group as defined in the thirteen General Asset Classes or North American Industry Classification System. Personal property cannot be exchanged for real property.
Intangible personal property including patents, copyrights, fish permits, sports contracts, airline landing and take-off rights, software, franchise rights, television and radio licenses and customer records are like kind exchange examples.
Business Sales
When a business is sold, assets are divided into real, personal property and good will. Good will is not eligible for 1031 treatment. The taxpayer can exchange only the real property and pay tax on the personal property and good will.
An example is a fast food franchise who leases the real property for ten years with four five year options or more that represents a thirty year lease. A thirty year lease is considered real property. The taxpayer can sell the lease and the franchise rights and defer the capital gain given real property and another franchise interest is acquired for a price equal to or greater than the price received.
Another example is the owner of a bowling alley looking to relocate to another site or into a larger metropolitan area. Assets are divided into the appropriate property categories, the CPA determines the recognized gain and replacement property with similar asset classifications is evaluated to determine whether the 1031 exchange makes sense.
Like kind exchange examples are all around us. When you are considering selling property, you must ask your CPA whether the tax justifies a 1031 exchange. It is far better to ask before, because afterwards, it is too late.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
