PAY NO CAPITAL GAINS TAX WHEN DISPOSING OF PERSONAL PROPERTY

Most people realize that when they dispose of business used or investment held real property, they have the opportunity to pay no capital gains tax through Section 1031 of the Internal revenue Code. But few people realize that the same section of the code allows them to pay no capital gains tax when disposing of personal property. 

Personal property held for productive use in a business or for investment may be Exchanged for other “like-kind” or “like-class” personal property. While the definition of what is like-kind for real property is broad; the definition of what is like-kind or like-class for personal property is much more restrictive. For example, while undeveloped land may be Exchanged for an office building, a car may not be Exchanged for a truck under the provisions of Section 1031.  
Though there are separate ExchangeRegulations (as of April, 1991) for personal property and separate ExchangeRegulations (as of May, 1991) for real property, the legal principles governing these types of transactions are pretty much the same with a few exceptions. 

The definition of like-kind personal property is more restrictive than that of real property.  The personal property regulations introduced a like-class safe harbor for depreciable tangible personal property. If the depreciable tangible personal property does not qualify as like-class under the regulations, it may still be like-kind and still qualify for non-recognition. Under the regulations, depreciable tangible personal property is like-class if it is within the same “general asset class” or within the same “product class”. A single property may not be classified within more than one general asset class or within more than one product class. In addition, property classified within any general asset class may not be classified within a product class. For example, an automobile and bus are not like class because they are in different general asset classes, although they are in the same product class.  

General Asset Class

· Office furniture, fixtures and equipment Data handling equipment, except computers  Information systems (computers, ect.)

· Airplanes and helicopters, provided they are not used commercially
· Automobiles, including taxis
· Buses
· Heavy general purpose trucks
· Railroad cars and locomotives
· Tractor units
· Trailers and trailer-mounted containers
· Vessels, barges, tugs, except those used in marine construction
· Industrial steam and electric generation and/or distribution systems

The product classes are from Division D of the Standard Industrial Classification Manual of 1987 that has recently been merged into the North American Industry Classification System. If the depreciable tangible property does not fall within the General Asset Class or product Class, the Exchangecan still be completed as long as the relinquished property and replacement property are still considered like-kind.

An Exchangeof intangible personal property and non-depreciable personal property qualifies only if the Exchangeproperties are of like-kind since there are no like classes provided for these types of properties as in depreciable tangible personal property. The test of whether intangible personal property is of a like-kind depends upon the nature or character of the rights involved and also on the nature and character of the underlying property to which the intangible personal property relates. For example, a copyright on a novel can be Exchanged for a copyright on another novel but a copyright on a novel cannot be Exchanged for a copyright on a song because they are considered not like-kind.

Goodwill of one business, however, is not considered like-kind with goodwill of another business and is, therefore, not eligible for Exchangetreatment. Covenants not to compete are not subject to capital gains taxes, and therefore, are not Exchangeable. Livestock of different sexes are also not considered like-kind property, but the same sex are.

Examples

Corporate turbo prop plane for a corporate jet, dental practice for a dental practice, restaurant equipment for restaurant equipment, manufacturing equipment for manufacturing equipment, garbage route for a garbage route, Mexican gold coins for Austrian gold coins, Exchangeof major league sports contracts, etc. are just some of the types of personal properties that are eligible for Exchangepurposes through Section 1031.

Any time you are thinking of disposing of a farm, motel/hotel, or other real property that involves personal property, or a business which includes equipment, furniture, planes, trains or other personal property, you must remember that you have an opportunity to pay no capital gains tax not only on the real property but on the personal property. Like any deferred Exchangetransaction, always consult with a professional qualified intermediary.