1031 Like Kind Exchange

	All 1031 exchanges should be for like-kind property. There are 2 categories of like-kind exchanges:
		1) Real property exchanges 2) Personal property exchanges

Generally no gain or loss is recognized if you exchange property held for use in your trade or business or for investment for new business or investment property that is like-kind.

However, if as part of the exchange transaction, you also receive non-like-kind property ("Boot") such as cash, services or differing property - gain must be recognized to the extent of this non-like-kind property received.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness. Nor does Section 1031 apply to "personal use property" (i.e. second homes and family cars) used primarily for personal use rather than for use in your trade or business or for investment.

Real Property Exchanges

All U.S. real-properties (brick/mortar and land) are generally like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside of the United States are not like-kind.

Personal Property Exchanges

The like-kind standards for personal property (non-real estate) are much more complex and stringent than for real property. For example, livestock of different sexes are not like-kind. Also, personal property used predominantly in the United States and personal property used predominantly OUTSIDE the United States are not like-kind properties.

Personal property exchanges can involve many types of property, such as: business equipment, aircraft, collector cars, ships, fleets of rental-automobiles, trucks, heavy-equipment, art work, broadcast-licenses, copyrights, franchise-licenses, gold coins, paintings, and other collectibles.

The IRS determined that the like-kind standards for personal property were unclear and un-manageable. So they issued special-regulations that create a like-class safe-harbor for "depreciable tangible personal-property".

Depreciable tangible personal property is property that you can take federal depreciation deductions for.

In order depreciate property it has to:

1) Be used in a trade or business or used for the production of income

AND

2) Must have a determinable life of longer than one year

This type of property may be exchanged for either "like-kind" or "like-class" property.

Safe-Harbor for Like-Class Property

General Asset Class:

The first step to determine if depreciable tangible personal property is like-class is to check to see if both properties (relinquished property and replacement property) involved in the exchange are in the same General Asset Class as set out in Revenue Procedure 87-56. There are 13 general asset classes. Your property will be considered like-class if they are both in the same asset class. An example would be under 00.242, in which a Heavy General Purpose Truck is in the same asset class as a Concrete Ready Mix-Truck; or under 00.11 office furniture such as a Desk is in the same asset class as a Safe. These properties would be considered like-class under the Safe-Harbor and thus would be like-kind.

NAICS Product Class:

The next step to determine if depreciable tangible personal property is like-class is to check and see if both properties (relinquished property and replacement property) involved in the exchange are in the same 6-digit NAICS Product Class (except any ending in 9) in sectors 31 through 33 of the North American Industry Classification System manual. If both properties have the same NAICS code, they are considered like-class. Note some property may fall into more than one NAICS product class, giving you some flexibility to pick the class with the most potential matching like-class assets.

Property listed in different General Asset Classes will not be considered like-class even if they are listed in the same NAICS Product Class.

Remember the like-class safe harbor is just a bright-line revenue procedure. Even if two properties do not fall into the same General Asset Class or NAICS Product Class, you could still successfully make the argument that they are like-kind because the differences are only slight. For example, an SUV may be deemed to be like-kind with a Passenger Van or a Car because the dissimilarities do not rise to a difference in nature or character but merely grade or quality

No Safe-Harbor for
Intangible Personal Property or
Non-Depreciable Personal Property...

Intangible personal property (a patent or copyright) and non-depreciable personal property (artwork and collectables) can be exchange for other like-kind property, however, there are no Safe-Harbor Like-Class type regulations to comply with.

Under Treas. Reg. §1.1031(a)-2(c), intangible personal property (a patent or copyright) is considered "like-kind" based upon the "nature or character of the rights involved" and also on the "nature or character of the underlying property to which the intangible personal property relates." For example a copyright on a fictional book could be exchange for another like-kind copyright of a different fictional book, but could not be exchanged for a copyright on a motion picture movie. With patents, the underlying tangible personal properties to which the intangible asset relates should be compared using the same General Asset Classes and Product Classes already afforded for testing whether personal properties are of like class.

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