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Personal Property Exchanges

Exchanges frequently include personal property. However, personal property exchanges are just as common as real property exchanges. Personal property exchanges commonly occur with respect to corporate or business aircraft and ships, construction equipment, farm equipment, and even livestock.

The like-kind rules are more challenging for personal property than for real property. The like-kind provisions contained in the Regulations establish safe harbor definitions of like-kind replacement personal property if the replacement property is within the same "General Asset Class" or within the same "Product Class."

The General Asset Classes are found in the Regulations (§1.1031(a)-2(b)(2)) and can be summarized as follows –

  • Office Furniture, Fixtures, and Equipment
  • Information Systems (Computers and Peripheral Equipment)
  • Data Handling Equipment, Except Computers
  • Airplanes (Airframes and Engines), except those used in commercial or contract carrying of passengers or freight, and all Helicopters (airframes and engines)
  • Automobiles, Taxis
  • Buses
  • Light General Purpose Trucks
  • Heavy General Purpose Trucks
  • Railroad Cars and Locomotives, except those owned by railroad transportation companies
  • Tractor Units For Use Over-the-road
  • Trailers And Trailer-mounted Containers
  • Vessels, barges, tugs, and similar water-transportation equipment, except those used in marine construction, and
  • Industrial steam and electric generation and/or distribution systems

The Product Classes are found in Sectors 31, 32 and 33 (pertaining to manufacturing industries) of the North American Industry Classification System (NAICS) set forth in Executive Office of the President, Office of Management and Budget, North American Industry Classification System, United States, 2002 (NAICS Manual) as periodically updated.

The classes are broad for classes of equipment such as farm equipment, office equipment and hotel furnishings. Vehicles must be replaced with similar types of vehicles.

The services of a tax-professional are essential for successful personal property exchanges and related compliance with the like-kind replacement property rules.

Additional rules for exchanges of personal property (temporary) Reg § 1.1031(a)-2T

(a) through (b)(2) [Reserved]. For further guidance, see § 1.1031(a)-2(a) through (b)(2).

(b)

(3) Product classes. Except as provided in paragraphs (b)(4) and (b)(5) of this section, or as provided by the Commissioner in published guidance of general applicability, property within a product class consists of depreciable tangible personal property that is described in a 6-digit product class within Sectors 31, 32, and 33 (pertaining to manufacturing industries) of the North American Industry Classification System (NAICS), set forth in Executive Office of the President, Office of Management and Budget, North American Industry Classification System, United States, 2002 (NAICS Manual), as periodically updated. Copies of the NAICS Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce, and may be accessed on the internet. Sectors 31 through 33 of the NAICS Manual contain listings of specialized industries for the manufacture of described products and equipment. For this purpose, any 6-digit NAICS product class with a last digit of 9 (a miscellaneous category) is not a product class for purposes of this section. If a property is listed in more than one product class, the property is treated as listed in any one of those product classes. A property's 6-digit product class is referred to as the property's NAICS code.

(4) Modifications of NAICS product classes. The product classes of the NAICS Manual may be updated or otherwise modified from time to time as the manual is updated, effective on or after the date of the modification. The NAICS Manual generally is modified every five years, in years ending in a 2 or 7 (such as 2002, 2007, and 2012). The applicability date of the modified NAICS Manual is announced in the Federal Register and generally is January 1 of the year the NAICS Manual is modified. Taxpayers may rely on these modifications as they become effective in structuring exchanges under this section. Taxpayers may rely on the previous NAICS Manual for transfers of property made by a taxpayer during the one-year period following the effective date of the modification. For transfers of property made by a taxpayer on or after January 1, 1997, and on or before January 1, 2003, the NAICS Manual of 1997 may be used for determining product classes of the exchanged property.

(5) Administrative procedures for revising general asset classes and product classes. The Commissioner may, through published guidance of general applicability, supplement, modify, clarify, or update the guidance relating to the classification of properties provided in this paragraph (b). (See ยง601.601(d)(2) of this chapter.) For example, the Commissioner may determine not to follow (in whole or in part) a general asset class for purposes of identifying property of like class, may determine not to follow (in whole or in part) any modification of product classes published in the NAICS Manual, or may determine that other properties not listed within the same or in any product class or general asset class nevertheless are of a like class. The Commissioner also may determine that two items of property that are listed in separate product classes or in product classes with a last digit of 9 are of a like class, or that an item of property that has a NAICS code is of a like class to an item of property that does not have a NAICS code.

(6) No inference outside of section 1031. The rules provided in this section concerning the use of general asset classes or product classes are limited to exchanges under section 1031. No inference is intended with respect to the classification of property for other purposes, such as depreciation.

(7) Examples. The provisions of this paragraph (b) are illustrated by the following examples:

Example (1). and Example 2 [Reserved]. For further guidance, see §1.1031(a)-2(b)(7), Example 1 and Example 2.

Example (3). Taxpayer E transfers a grader to F in exchange for a scraper. Neither property is within any of the general asset classes. However, both properties are within the same product class (NAICS code 333120). The grader and scraper are of a like class and deemed to be of a like kind for purposes of section 1031.

Example (4). Taxpayer G transfers a personal computer (asset class 00.12), an airplane (asset class 00.21) and a sanding machine (NAICS code 333210), to H in exchange for a printer (asset class 00.12), a heavy general purpose truck (asset class 00.242) and a lathe (NAICS code 333210). The personal computer and the printer are of a like class because they are within the same general asset class; the sanding machine and the lathe are of a like class because they are within the same product class (although neither property is within any of the general asset classes). The airplane and the heavy general purpose truck are neither within the same general asset class nor within the same product class, and are not of a like kind.

(8) Transition rule. Properties within the same product classes based on the 4-digit codes contained in Division D of the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987), will be treated as property of a like class for transfers of property made by taxpayers on or before [the date these regulations are published as final regulations in the Federal Register].

(c) [Reserved]. For further guidance, see §1.1031(a)-2(c).

(d) Effective dates. This section applies to transfers of property made by taxpayers on or after August 12, 2004. However, taxpayers may apply this section to transfers of property made by taxpayers on or after January 1, 1997, in taxable years for which the period of limitation for filing a claim for refund or credit under section 6511 has not expired. For all other exchanges occurring prior to August 12, 2004, see §1.1031(a)-2(d).

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