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1031 Strategies for Personal Property and Equipment

Ferrari 308 In 1980, a doctor bought a Ferrari 308 for $40,000.  He carefully parked it in conditioned space at his home, drove it a few times each year and frequently entered it in car shows.  In 2015, he was offered $3.5M for this pristine, iconic car with only 6,000 miles.   Because he believed that collectible cars were a great investment, he sold his Ferrari in a 1031 exchange and acquired two 1940 Roadsters as his replacement property.  With one smart move, he delayed his 7-figure tax gain and kept his equity– and hobby of proudly displaying his classic cars- going strong.

While real estate is the most common property involved in a 1031, there are many other assets that can be exchanged.  The IRS code defines qualified property as “property held for productive use in a trade or business or for investment”. Thankfully for investors and certain businesses, there are some lesser-utilized property types that can also take advantage of the inherent benefits of a 1031 exchange.

Four primary categories of qualified property are eligible for 1031 treatment:

1.      Real property, in which all property is like-kind with other property;

2.      Depreciable, tangible, personal property (DTPP), such as business equipment, vehicles, machinery;

3.      Intangible, non-depreciable, personal property such as patents, copyrights, trademarks; and

4.      Non-depreciable personal property such as art, antiques, coin collections, and musical instruments.

The key to utilizing a 1031 with a type of property that is other than real property is paying careful attention to defining what is “like-kind”.  For example, in livestock exchanges, a cow (female) is not like-kind with a bull (male);  similarly, in an equipment exchange, a pick-up truck is not considered like-kind with a dump truck. Unlike the broader nature of real property, to determine what is “like-kind” for the second primary category (DTPP), items must be in one of the same thirteen (13) general asset classes or under the same product code as outlined in the North American Industry Classification System (NAICS) manual.  Though it may be more restrictive in scope and challenging to determine what is “like-kind”, exchanging these types of assets is well worth the effort to avoid the higher recapture rate and keep all of the capital working for you.

We have assisted clients in completing 1031 exchanges on aircraft, collectibles, instruments used by professional musicians, heavy moving equipment, timber and livestock.  A more comprehensive list of assets that may be exchanged includes:

  • Agricultural equipment
  • Aircraft
  • Automobile fleets
  • Collectibles art and wine
  • Collectible cars
  • Coins, gems, stamps
  • Construction equipment
  • Race horses and livestock
  • Manufacturing equipment
  • Boats and marine equipment
  • Medical equipment
  • Mining equipment
  • Telecom/IT equipment (cell towers)
  • Timber
  • Vehicles
  • Utility infrastructure

Besides individual investors who collect non-depreciable personal property, there are a number of companies or manufacturers that buy, depreciate, use and replace equipment in the normal course of their business.  Examples include trucking firms, equipment leasing businesses, automobile leasing companies, construction firms and certain manufacturers. In order to defer significant gains when they sell assets and have to recapture depreciation at 35%, these businesses have or should consider implementing a “rolling stock in inventory” strategy under which assets are replaced through a 1031 exchange program. (For special allowances on bonus depreciation — up to 50-100% per year–the recapture consequences are even more dramatic.) By utilizing a 1031 with business equipment, significant tax dollars can be deferred through smart planning.

Violin

In summary, there are many more assets that can be exchanged besides real estate.  For allied professionals, it is important to understand how a 1031 exchange can assist clients in deferring taxes indefinitely, while keeping their equity working for them. A 1031 exchange can be an effective strategy in making business more profitable or improving investment returns.

If you have any questions, we’d love to hear from you at 678-403-4192.