1031 Intangible Personal Property

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 Technical Advice Memorandum (TAM) 200602034 expanded the scope of  intangible assets eligible for 1031 exchanges into five categories:

1. software
2. trademarks and trade names
3. trade secrets and know-how
4. designs and drawings
5. patents.

To be 1031 eligible, the TAM defines a two-step process matching both the nature or character of the intangible property with the nature or character of the underlying replacement property. For an exchange of franchise rights, the ruling states the first step is achieved if both the old (relinquished) property and the new (replacement) property are franchise rights.  The second step is matching the nature or character of the underlying asset with the general asset class or product class of the underlying replacement property. The North American Industry Classification System (NAICS) classifies like-kind class businesses.

Intellectual property exchanges for customer lists, manufacturing know-how, technical designs, and chemical formulas follow the same two-step process.  The character of the ownership rights of the unregistered intellectual property is like-kind to the character or nature of the rights to the replacement property.  The second step is satisfied given the general asset class or product class of the underlying intangible asset is the same. 

The TAM also addresses the location of intangible personal property asset stating use predominantly in the United States is like-kind to use predominantly in the United States.  Use predominantly in foreign countries is like-kind to use predominantly in foreign countries.

When selling an intangible asset and replacing with like-kind intangible asset, a 1031 exchange will defer the taxable gain.  Have a comment or question, let us know.