When property held for investment is sold, the potential impact of the capital gains tax is often considered. Regardless of the tax rate, most would generally prefer to keep more proceeds and pay less tax. Section 1031 of the Internal Revenue Code allows a taxpayer to defer all or part of any gain on the sale that would otherwise be subject to capital gains taxes into the future as long as the transaction is properly structured to comply with the requirements of the statute. The most common type of property involved in a 1031 exchange is real estate – exchange of one parcel of investment property for another.
Although the majority of 1031 exchange transactions involve real estate, the scope of the statute is not so limited. The exchange of personal property held for investment can also be structured as a 1031 exchange. For this purpose, “personal property” includes any tangible depreciable asset held for use in a trade or business or investment. Thus, motor vehicles, aircraft, boats and all types of business equipment can be exchanged. Intangible assets can also qualify for exchange treatment. These assets include trademarks or tradenames. The only requirement is that the intangible asset be valued separately from the good will of the business. Goodwill cannot be exchanged.
Often, a business owner is looking to get out of one business and try her hand at something new. In those circumstances, the selling owner may be able to structure the sale of certain assets of the business such that any gain on which capital gains taxes may be due is rolled into the purchase of new like kind assets for the new venture. The tax on the gain would be deferred to some later date. In this economy, less tax today is likely a good business plan.