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Solution Center | 1031 Personal Property Strategies

1031 Personal Property Strategies Overview

Personal collections such as art, wine, comic books, etc. are considered “personal property”.

A Section 1031 like-kind exchange (named for the Internal Revenue Code section governing such transactions) is specifically available for personal property assets. This can be of potential benefit for appreciated collection assets.

The 1031 exchange is an income tax strategy used to defer capital gains tax by rolling the taxable gain of an appreciated asset into a “like-kind” asset. It is most commonly used for appreciated real estate.

For the Section 1031 exchange to work for the personal property, such as an appreciated piece of art, the art being sold must be “exchanged” into the purchase of a new work of art of equal or higher value. However, one of the stipulations to qualify for a Section 1031 like-kind exchange is that the art is held for productive use in a trade or business (for example, art that is rented to various venues, not art held as inventory by a dealer) or is held for investment purposes. If a collector can meet that requirement, this is a relatively inexpensive and simple strategy and can have broad applicability.

What qualifies for “like kind” in the context of art is still uncertain. The nature or character of the property and not its grade or quality is what qualifies properties as “like-kind” in the tax laws translations. This suggests that one art work exchanged for another art work in a different medium would be a “like-kind” exchange as the nature or character of the properties as “works of art” is the same. For example, an individual may be able to do a Section 1031 exchange of a painting for a sculpture or a work on paper for a painting. However, it should be noted that what qualifies art as “like kind” may often be subjective.

There are a number of constraints on like-kind exchanges, including the time frame in which the exchange must be completed. Collectors who are interested in these transactions are invited to review the applicable rules with one of our experienced professional before beginning the exchange process.

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