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Intangible Personal Property

Intangible personal property is property that has only a legal existence rather than a physical existence, such as stocks, bonds, patents, copyrights and land use rights. The legal right to this kind of personal property is usually evidenced by a certificate, license or permit that fixes or approximates the value of the property and/or the right to control it. The world of intangible property rights is vast, warranting a careful consideration by you before concluding that you do not have a qualifying asset.  Please see  Intangible Property Examples for a more comprehensive outline of this kind of personal property.

Under the Tax Regulations to Section 1031, replacement property must also be of "like-kind." The rules are less clearly defined here and depend on the "nature or character" of the property rights involved in claiming a legal right to the intangible property. For instance, one can exchange a patent for a patent, or a Cable TV franchise in one state for a Cable TV franchise in a different state. You should consider this analysis as only the first step in meeting the like-kind requirement of Section 1031, however.  You must also consider the "nature or character" of the underlying property related to the intangible personal property right. For instance, one may hold a patent to a particular type of aircraft wrench (the patent being the claim to exclusive ownership of its design and function). While the patent is a form of intangible property, the patent can only be exchanged for another patent to a different type of wrench but not to a patent for a certain aircraft engine design.

In creating this two-part test, the IRS extended the methodology of the "like-class" test for tangible depreciable property to intangible personal property, requiring an analysis of the underlying properties as to general asset or product classes. If the relinquished and replacement properties do not fall in either the same general asset class or same product class, they fail as "like-kind" properties even if the legal claim (e.g., a patent) is identical.  The IRS created such an exacting set of rules that the Taxpayer’s success in satisfying the “like-kind” requirement of Section 1031 is nominal. Here, success likely rests in the rare circumstance in which the Taxpayer and buyer are actual competitors engaged in the same line of business involving the same underlying assets. See Technical Advice Memorandum 2006-02034.

Examples

The Tax Regulations provide the following examples:

Example 1. Taxpayer K exchanges a copyright on a novel for a copyright on a different novel. The properties exchanged are like-kind.

Example 2. Taxpayer J exchanges a copyright on a novel for a copyright on a song. The properties exchanged are not like-kind.