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Exchanging Personal Property - Part 2

Many business owners or investors may not think about exchanging personal property because personal property in most cases does not appreciate in value over time to cause a taxable capital gain upon the sale of such items. However, business owners and investors often depreciate personal property on an annual basis.

This depreciation could cause the business owner or investor to experience a significant amount owed in deprecation recapture once the property items are sold.

If the business owner or investor is planning to replace these depreciated items, they would benefit from a 1031 exchange that would allow them to defer the depreciation recapture amount and leverage the income for greater returns.

In part 1 of this blog, we gave examples of property that could qualify as exchangeable personal property. We must now talk about how to determine what property can qualify as replacement personal property.

Section 1031 of the Internal Revenue Code stipulates that property must be exchanged for “like-kind” property. Per this regulation, real property cannot be exchanged for personal property. But personal property that was held for rental purposes, investment, or use in your trade or business can, in fact, be exchanged for like-kind personal property that will be held for the rental purposes, investment or use in your trade or business.

“Like-kind” means that the properties are of the same nature, character, and class. Quality or grade is not a factor in determining if properties are like-kind. While most real estate is like-kind to other real estate, the rules determining whether or not personal properties are like-kind are stricter. For example, cars and trucks are not of a like-kind nature.

Tangible, depreciable personal properties are considered like-kind if they are like-class. Such items are like-class if they are categorized within the same General Asset Class or Product Class. Product Classes are found in Sectors 31 through 33 of the North American Industry Classification System (NAICS).

Intangible personal property is not classified by the NAICS, and is, therefore, more difficult to determine if it is like-kind to another intangible personal property item. “Like-kind” for intangible items depends 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. A good rule of thumb is to determine if the underlying tangible personal properties to which the intangible assets relate are like-class and categorized within the same General Asset Classes and Product Classes. If so, the intangible assets will probably qualify as like-kind.

If you have replacement personal items that are like-kind to your relinquished personal items, then you can qualify for tax deferral through a properly completed 1031 exchange. It is important to remember that personal property exchanges must be conducted following the same rules and regulations as real property exchanges. This includes using a qualified intermediary and abiding by the 45-day identification and 180-day exchange periods.

Finally, if you intend to complete multiple exchanges at the same time with the same buyers and sellers, you should complete each exchange as a separate transaction. Avoid confusion and complications by using separate contracts for each exchange. Don’t include a real property exchange with a personal property in the same transaction. These items are not like-kind, and, if they appear to be exchanged for one another because both transactions occur together, they could disqualify your 1031 exchange.

As always, we recommend you consult a tax advisor to help you throughout your exchange process to ensure a compliant exchange of eligible, like-kind properties.

Exchanging Personal Property - Part 1

In your past property acquisitions, you have probably encountered situations when you’ve had opportunities to acquire additional items that related to your main purchase. A seller may have been willing to include appliances and furniture with the sale of a home. A seller of a factory or a farm may have been willing to include equipment and tools in the sale. If you were attempting to complete a 1031 exchange with these purchases, you were probably warned that these extra items would be considered boot and could trigger a taxable event.

Calculating Depreciation

Last week we introduced depreciation and mentioned that a 1031 exchange can save you from the immediate cost of depreciation recapture. To fully understand depreciation, including how the year you purchased the property and various depreciation methods factor into your calculations, consult your tax advisor or IRS publication 946. Today, we'd like to look at some additional basics you should know before you file this year's tax return or begin your 1031 exchange.

Depreciation: What is it? A Blessing & A Curse

It isn't fun to consider how your real estate properties have deteriorated as they face another year of use by tenants, harsh weather conditions, aging building materials, and other factors. However, when that deterioration results in tax deductions and increased cash flow, then maybe it isn't so bad. When it comes to accounting books and tax returns, this deterioration is known as depreciation.

What Cap Rate is Right for You?

There’s much debate when it comes to determining what capitalization rates (cap rates) to look for when making a real estate investment.

Benefits of the Seven Deadly Sins

The Internal Revenue Ruling 2004-86 names seven deadly sins that limit the Delaware Statutory Trust ("DST") trustee's power. Deadly sins can sound intimidating, and engaging in any one of these prohibited acts can have serious consequences for the DST and its beneficiaries.

Replacement Property Identification

There are very specific requirements for identifying and acquiring potential like-kind replacement properties in your 1031 Exchange transaction. Replacement properties that you are considering for acquisition in your 1031 Exchange should be identified to your Qualified Intermediary (Accommodator) and must be identified no later than midnight of the 45th calendar day following the close of your relinquished property sale transaction.

Fulfilling Debt Requirements with DSTs - 1031 Exchange Requirements Fulfillment

Last week as you read about the necessity of adhering to the Debt Replacement Principle when completing a 1031 exchange, you may have had one important question running through your mind: “Can I obtain debt to meet my 1031 exchange requirements if I invest in a Delaware Statutory Trust (DST)?”


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