Tax Alert: IRS to Allow Intangible Property to Qualify as Like-Kind Exchange Property
12/03/2009
It’s not often that the IRS grants taxpayers additional tax planning opportunities, but earlier this year it did just that. Reversing a long-held position that intangible property such as trademarks, trade names, and customer-based intangibles are not eligible as like-kind property, the IRS has set forth in pronouncement CAA 200911006 that such type property can now qualify as like-kind property under Section 1031.
Section 1031 is a taxpayer-friendly statute that allows an investor to sell a property, to reinvest the proceeds in a new property, and to defer taxes where certain time and identification limits are met. A properly structured 1031 exchange is the transfer of property for property, thus deferring taxes. Any cash received, any reduction in mortgage, or any other non-like-kind property received is considered “boot” and is taxable to the extent of the gain. To fully defer all taxes, an Exchanger must meet two requirements:
1. REINVEST ALL EXCHANGE PROCEEDS – If an Exchanger does not reinvest all exchange proceeds from the sale of the relinquished property, the balance received is considered “cash boot,” and gain may be recognized on the amount.
2. ACQUIRE PROPERTY WITH THE SAME OR GREATER DEBT – If an Exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, which is considered “mortgage boot.” The IRS considers this reduction in debt a benefit to the Exchanger. Therefore, it is taxable unless it is offset by adding equivalent cash to the replacement property purchase.
Properly structured 1031 exchanges have been a powerful tax deferral strategy and now that the IRS has stated that intangible property can also qualify for like-kind treatment, taxpayers will be looking at the intangible assets they currently own as potential vehicles to swap for other intangibles and enjoy a tax deferral. This may be especially true for taxpayers with significant intellectual property including customer based intangibles such a customer lists.
Not all intangible assets qualify. The regulations provide that goodwill and going concern can never be like-kind property. Partnership interests also cannot qualify. For more information, we encourage you to contact Joseph A. Tighe, CPA, a J.H. Cohn tax partner and a member of the Firm's State and Local Tax (SALT) Group, or your J.H. Cohn professional at 877-704-3500.
Joseph A. Tighe, CPA, is a J.H. Cohn tax partner and a member of the Firm's Tax Specialty Services Group with a specific focus on State and Local Tax (SALT) services, including conducting sales tax research and addressing Nexus issues. Further, as a member of both J.H. Cohn's Construction Industry Practice and Real Estate Industry Practice, his broad range of experience helps client maximize depreciation benefits by performing cost segregation studies, He can be reached via email or at 877-704-3500.
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