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STRATEGIC TAX SERVICES


What Can Be Exchanged

Exchange Basics

What Can Be Exchanged

Property used in a trade or business and investment property held for appreciation may be exchanged.

  • Real Estate. Real estate including water, timber and mineral rights, easements and long-term leases.
  • Tangible depreciable property, such as machinery, heavy equipment, and fleet transportation (trucks, boats, cars, buses, planes).
  • Tangible non-depreciable property, such as collectibles, autos, artwork, and precious metals (e.g., gold and silver coins).
  • Intangible property (intellectual property), such as patents, franchises, licenses, trade names, secret formula, copyrights, and internet domain names.

Stocks, bonds and partnerships may not be exchanged. (See what cannot be exchanged?)

Examples of Real Estate Property

  1. Fee Interest (which is an entire interest in real estate).
  2. Fractional interests, such as a partial undivided interest as a tenant-in-common with other partial interest owners.
  3. Leasehold interests that are 30 plus year leases. See Treas. Reg. 1.1031(a)-1(c). Permanent easements for conservation and right-of-ways, such as utility easements or towers. PLR 96-01-046.
  4. Development rights. PLR 200805012.
  5. Perpetual water and mineral rights. Revenue Ruling 55-749 , Oil & Gas rights.
  6. Payment for Tobacco Quotas.
  7. Air Rights. Revenue Ruling 54-575, Revenue Ruling 71-286.
  8. Mitigation credits for the restoration of wetlands.
  9. Rental houses in the U.S. for rental condominium units in the Virgin Islands. PLR 9038030.
  10. Real property for 100% of interests in a partnership owning real property. PLR 200807005.
  11. Fee simple interests in real property for fee simple interests in other real property subject to 99-year condominium leases.
  12. Real property containing an operating sand mine for commercial rental property. Beerler v. Comm'r, TC Memo 1997-73.
  13. Gold mine for a coal mine.
  14. Commercial building for a condominium interest in a newly constructed commercial building.
  15. Cooperative housing corporation stock for condominiums in the same physical property.
  16. Deep water storage terminal facilities for similar facilities situated inland.
  17. Timberland.
  18. Unencumbered farm lands, farm buildings and unharvested crops together as one property.
  19. Lease interest under 30 years.
  20. Billboards / outdoor advertising displays.

Intangible Assets

It is obvious that intellectual property has come of age. Intellectual property become a very important aspect of American business life and a valuable business asset.

Patents, Trade Secrets, Copyrights, Trademarks, Trade names, Domain names, Computer software, Web Contents and other forms of IP assets represents an estimated 60% of corporate assets.

The IRS has gone from barely acknowledging intellectual property to providing alternatives in how to structure intellectual property transactions. Significantly the IRS has accepted exchanging intellectual properties that are like kind to each other.

A key aspect of intellectual exchanges is careful advance planning and identification of the nature and character of the intellectual properties involved, including the bundle of rights involved and the underlying nature of the business involved on the exchange.

Secondly, as is the case with the purchase and sale of assets in business transactions, multi asset exchanges must specifically identify the assets in advance, at the time of the negotiation and execution of the purchase and sale document. This aids in the matching of asset classes and allocation of debt, if any. For those familiar with asset purchase transactions, many times the identification and allocation of purchase price is attached to the deal documents months later. This is not possible with the like kind exchange of intellectual property.

Finally, a many times a transaction may not be recognized initially as a sale to the owners. Installment payments, contingent payments for intellectual property sold separated from a trade or business, upfront payments, exclusive license or non-exclusive licenses have varying tax consequences.

 
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