Thursday, July 1, 2010 at 01:52PM | Staff Taxpayer's Rental Equipment Does Not Qualify For 1031 Exchange Treatment
The National Office of the Chief Counsel of the Internal Revenue Service issued Chief Counsel Advisory No. 201025049. Chief Counsel Advisory No. 201025049 concluded that Taxpayer’s disposition of and subsequent reinvestment in rental equipment did not qualify for 1031 Tax Deferred Exchange Treatment under Section 1031 of the Internal Revenue Code.
The Taxpayer is in the routine business of selling, renting, servicing, and financing equipment, which the Taxpayer classifies as held for rental (investment) or held for sale (inventory) upon purchase from the manufacturer.
Rental equipment that was initially classified as held for rental (investment) upon purchase may be subsequently sold to a renter or other purchaser at a later date. There is no prior purchase and sale agreement or other contract in place with the renters as to how much of the rental payments, if any, will be applied toward the purchase price of the subject rental equipment. The price is negotiated at the time that the renter decides to acquire the rental equipment.
The Taxpayer has been structuring 1031 Tax Deferred Exchanges on the sales and dispositions of the subject rental equipment when sold to the renters or other purchasers.
The IRS Chief Counsel concluded that the rental equipment that had been classified as held for rental (investment) was not actually held for for rental purposes, but was actually held as inventory in the Taxpayer's business and was therefore held for sale and not investment. Temporarily withdrawing equipment from inventory held for sale does not convert the equipment from inventory held for sale into equipment held as rental property.
The determination of whether property is held as rental property, investment property or used in a trade or business must be made on a property-by-property basis.
