Are Like-Kind Exchanges for Personal Property Allowed?

A like-kind exchange is a tax-deferral strategy that allows an owner to postpone paying tax on the gain from a sale of property. This is accomplished by reinvesting the proceeds into a similar replacement property. For many years, this benefit was available for both real estate and personal property, but a federal tax law change has restricted this provision almost exclusively to real property.

The ability to defer gains on exchanges of personal property has been eliminated for most transactions. This change alters the financial consequences for businesses that regularly trade or upgrade assets like equipment and vehicles. The tax implications of selling or exchanging personal property are now immediate.

The Repeal of Personal Property Like-Kind Exchanges

The Tax Cuts and Jobs Act of 2017 (TCJA) was the legislation responsible for eliminating like-kind exchange treatment for personal property. This overhaul of the U.S. tax code amended Section 1031 of the Internal Revenue Code to specify that the tax deferral applies only to exchanges of real property held for productive use in a trade or business or for investment.

This change became effective for any exchanges completed after December 31, 2017. Consequently, assets such as equipment, vehicles, machinery, artwork, collectibles, and intangible assets are no longer eligible for this tax deferral at the federal level. The repeal is a permanent feature of the current tax code.

Before the TCJA, taxpayers could swap one piece of business equipment for a similar one and defer the tax on any appreciation. Now, such a transaction is treated as a taxable sale of the old asset followed by a separate purchase of the new one.

Defining Personal Property Under Former Rules

Before the TCJA, the rules for personal property like-kind exchanges were specific, distinguishing between tangible and intangible assets. For tangible personal property, the standard was whether the assets were of a “like-kind,” which referred to their nature and character. A more restrictive but safer method involved the concept of “like-class,” which provided a safe harbor for taxpayers.

Under the like-class rules, assets were considered of the same class if they were within the same General Asset Class. The General Asset Classes were outlined in Treasury Regulations and included categories such as:

• Office furniture, fixtures, and equipment
• Information systems
• Automobiles
• Light or heavy general-purpose trucks

If both the relinquished and replacement properties fell into the same class, the IRS considered them to be of like-kind.

For assets not described in a General Asset Class, taxpayers could use the North American Industry Classification System (NAICS). If the properties were within the same six-digit NAICS code, they were considered like-class. This system provided a framework for identifying similar assets, from agricultural machinery to manufacturing equipment.

Intangible personal property, such as patents, copyrights, and trademarks, also qualified for like-kind exchange treatment under the old rules. The determination for these assets depended on the nature or character of the rights involved and the underlying property. For example, exchanging a patent on one type of technology for a patent on a very similar technology could have qualified, but exchanging a copyright for a trademark would not have.

Tax Consequences of Selling Personal Property Today

With the repeal of like-kind exchanges for personal property, any sale or disposition is now a fully taxable event. When a business sells an asset like a vehicle or machinery, it must calculate the taxable gain or loss. This is determined by subtracting the asset’s adjusted basis from the amount realized from the sale. The adjusted basis is the original cost of the asset minus any depreciation deductions taken.

A significant consequence of this change is the application of depreciation recapture rules under Internal Revenue Code Section 1245. This provision requires that any gain realized on the sale of depreciable personal property be treated as ordinary income, not capital gain, up to the amount of depreciation previously deducted. For example, if a business bought a machine for $50,000, claimed $30,000 in depreciation, and then sold it for $40,000, the adjusted basis would be $20,000. The total gain is $20,000.

Under Section 1245, that entire $20,000 gain is “recaptured” and taxed as ordinary income because it is less than the $30,000 of depreciation taken. Ordinary income tax rates are often higher than long-term capital gains rates, making the tax liability more significant. This recapture mechanism prevents taxpayers from benefiting from depreciation deductions that reduce ordinary income, only to later have the gain on the sale taxed at lower capital gains rates.

If the sale price had been $60,000, the total gain would be $40,000 ($60,000 sale price – $20,000 basis). In this scenario, the first $30,000 of the gain would be recaptured as ordinary income. The remaining $10,000 of gain would then be treated as a Section 1231 gain, which may be eligible for more favorable long-term capital gains tax rates, depending on the taxpayer’s other transactions during the year.

Limited Transition Rule for Certain Exchanges

The TCJA included a very narrow transition rule to accommodate certain personal property exchanges that were already in progress when the law changed. This rule allowed a transaction to proceed under the old like-kind exchange provisions if specific conditions were met. It was designed to provide relief for taxpayers who had committed to an exchange based on the pre-TCJA rules.

To qualify for this relief, the taxpayer must have either disposed of the relinquished personal property or acquired the replacement personal property on or before December 31, 2017. This meant that if the first leg of the exchange was completed by the end of 2017, the taxpayer could still complete the second leg of the transaction in 2018 and receive tax-deferred treatment.

This provision was a one-time exception and is no longer applicable for any current transactions. For any exchanges of personal property initiated after January 1, 2018, the repeal is fully effective, and the transaction is taxable.