6.2 Personal Property Held for Business or Investment
Gain on an exchange of depreciable tangible personal property held for productive business or investment use is not taxed if the properties meet either the general like-kind test (6.1) or a more specific “like-class” test created by IRS regulations. The assumption of liabilities is treated as “boot” (6.3). Where each party assumes a liability of the other party, the respective liabilities are offset against each other to figure boot, if any.
Under the like-class test, there are two types of “like” classes: (1) General Asset Classes and (2) Product Classes. The like-class test is satisfied if the exchanged properties are both within the same General Asset Class or the same Product Class. A specific asset may be classified within only one class. Thus, if an asset is within an Asset Class, it is not within a Product Class. The Asset Class or Product Class is determined as of the date of the exchange. This limitation may disqualify an exchange when exchanged assets do not fit within the same Asset Class and are not allowed to qualify within the Product Class; see the Brown Example below.
Planning Reminder
General Asset Classes.
There are 13 classes of depreciable tangible business property. Here are some of the asset classifications: office furniture, fixtures, and equipment (class 00.11); information systems: computers and peripheral equipment (class 00.12); data handling equipment, except computers (class 00.13); airplanes and helicopters, except for airplanes used to carry passengers or freight (class 00.21); automobiles and taxis (class 00.22); light trucks (class 00.241); heavy trucks (class 00.242); and over-the-road tractor units (class 00.26). For example, trades of trucks in class 00.241 would be of like class.
Even if exchanged properties are in different General Asset Classes (and thus are not of “like class”), they can be of like kind, so that gain on the exchange is not immediately taxed under the like-kind exchange rules (6.1). For example, the IRS in a private ruling held that although an SUV and an automobile are in different asset classes, the differences between them are merely in grade or quality and do not rise to the level of a difference in nature or character. They are therefore of like kind and gain on the exchange is not taxed.
Product Classes.
The IRS uses the North American Industry Classification System (NAICS) for determining product classes of depreciable tangible personal property. A product class is assigned a six-digit NAICS code.
Intangible personal property and goodwill.
Exchanges of intangible personal property (such as a patent or copyright) or nondepreciable personal property must meet the general like-kind test to qualify for tax-free treatment; the like-class tests do not apply. However, regulations close the door for qualifying exchanges of goodwill in an exchange of going businesses. According to the regulations, goodwill or going concern value of one business can never be of a like kind to goodwill or going concern value of another business.
Exchanges of multiple properties.
Generally, exchanges of assets are considered on a one-to-one basis. Regulations provide an exception for exchanges of multiple properties, such as an exchange of businesses. Transferred assets are separated into exchange groups. An exchange group consists of all properties transferred and received in the exchange that are of a like kind or like class. All properties within the same General Asset Class or same Product Class are in the same exchange group. For example, automobiles and computers are exchanged for other automobiles and computers; two exchange groups are set up—one for the automobiles and the other for the computers. If the aggregate fair market values of the properties transferred and received in each exchange group are not equal, the regulations provide calculations for setting up a residual group for purposes of calculating taxable gain, if any.
All liabilities of which a taxpayer is relieved in the exchange are offset against all liabilities assumed by the taxpayer in the exchange, regardless of whether the liabilities are recourse, nonrecourse, or are secured by the specific property transferred or received. If excess liabilities are assumed by the taxpayer as part of the exchange, regulations provide rules for allocating the excess among the properties.