Cars and Trucks are Getting More Like-Kind for 1031 Exchanges

(Listen Here 4:26 min)

Cars and trucks are getting more like-kind. The IRS recently issued a private letter ruling (LTR 200912004) specifically to a tax-payer that was a rental car company that conducted ongoing 1031 like-kind exchange programs. So, every time they disposed of their old rental cars, those were the disposition of “relinquished properties”. Every time they brought in new cars into their rental fleet, those were the “replacement properties”. This was an ongoing cycle, a program of exchanges that had been incorporated into their business model to have the most efficient (tax neutral sale) disposition of their properties. This particular taxpayer had a conundrum, because appreciable personal property such as rental cars are broken into different asset classes.

Cars and Trucks…Depreciable Tangible Personal Property are
 Normally Only Considered Like-Class to
Other Depreciable Tangible Personal Property in
the SAME *General Asset Class*

There are thirteen different “general asset classes” set out in Rev. Proc. 87-56. Two of those asset classes are applicable to this taxpayer’s property. Asset class 00.241 is for general purpose light duty trucks, while asset class 00.22 is for cars and taxis. Depreciable tangible personal property is of a like-class to other depreciable tangible personal property if the exchanged properties are either within the same General Asset Class or within the same (North American Industry Classification System – NAICS) Product Class. The conundrum that this taxpayer had is that since these general assets had been created, the car industry has morphed, and we now have ‘crossover vehicles’ and ‘sport utility vehicles’ and little ‘minivans’. There are cars that look like trucks, and trucks that look like cars, and it is hard to determine whether these automobiles and light duty trucks and crossovers (in the middle) are like-kind. Especially if they are in separate general asset classes.

Throw Out the Mumbo Gumbo “General Asset Classes”

Alright, this private letter ruling from the Internal Revenue Service is very taxpayer friendly because this acknowledges that the industry has changed, and that the regulation of automobiles has changed. The IRS basically said “Look, even though these items are not in the same general asset class, they can still be considered like-kind”. So, this private letter ruling is taxpayer friendly in that it acknowledges that the car industry has changed, and it gives the taxpayer the ability to exchange an SUV for a car… a light duty truck that is less than thirteen thousand pounds in weight for another automobile or SUV or minivan that is in that same general ‘genre of automobile’.

1031 Exchanges Just Got Easier

This private letter ruling is good for the U.S. automobile leasing industry. It is good for consumers, and it is good for America because Section 1031 stimulates economic growth by allowing business owners and investors to move their capital to the most advantageous replacement property. It also minimizes a drag that normally would occur from income tax and capital gains taxes. Section 1031 helps the automobile leasing industry, and it can help other investors and business owners also. Section 1031 is broader than just real estate. We can see in this private letter ruling that automobiles, light duty trucks and minivans all quality for 1031 treatment if they are exchanged for other like-kind property that will also be used in their trade or business of the taxpayer.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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