The IRS also permits the deferral of capital gains on the purchase and sale of like-kind personal property. The interpretation of “like- kind” with respect to personal property is much stricter than that applied for real property. To qualify, the relinquished and replacement personal property must be in the same General Asset Class or Product Class. This designation includes, office furniture and equipment, airplanes, taxis, tractors, barges and railroad cars.
If an investor sells a business, together with the land on which the business is located, the investor must structure two exchanges. The first exchange pertains to the personal property. Relinquished personal property must be exchanged for personal property of the same class. The second exchange pertains to the real property (i.e. the building including fixtures), which can be exchanged for any like-kind investment real property.
These types of exchanges are highly technical and require consultation with the investor’s accountant or tax attorney to determine the breakdown of the contract price, the exchangeable personal property as well as the tax benefit as it pertains to the individual investor.
Example: Sale of Business – A common type of personal property exchange is the personal property associated with the sale of a business. Personal property not permanently affixed to the structure as well as a liquor license are exchangeable. For example, if $50k of chairs are sold the investor must acquire $50k worth of chairs as the like-kind replacement property. If only $25k of chairs are purchased, the funds remaining cannot be reallocated to another general asset class and are taxable at the applicable capital gains rate. Items not exchangeable in the exchange of a business are covenants not to compete, the goodwill of a business and the inventory associated with the business.