Go for the Gold

In tough economic times, investors often turn to the perceived safety of gold and other precious metals. We have seen a steady stream of real estate and other investors liquidate their investments and reinvest the proceeds into gold and other precious metals. Sometimes these investments take the form of bars, coins, and other various forms. Whether or not gold, other precious metals, or any other investment is right and proper for a particular person is entirely up to that person and his or her investment professionals. However, we have also started to field questions on how 1031 exchanges can be used in connection with these new investments.

The same general rules of section 1031 apply. The relinquished and replacement properties must both be held for productive use in a trade or business or held for investment. In these cases, the gold is typically held for investment. The same time periods apply as in any deferred exchange.

Where the issues arise is in determining whether the relinquished property is "like-kind" to the replacement property. In making this determination the IRS and the courts have looked to a couple of differences. The first step of the analysis is to determine the form that the gold, or other precious metal, is held. For example, does the investor hold gold coins or bars. If the investor holds coins, the IRS will determine whether the coins are currency or legal tender (to the extent of their face value). Currency, in its usual and ordinary acceptation, is defined as gold, silver, other metals, or paper used as a circulating medium of exchange. If the coins are currency or legal tender, they do not qualify at all under section 1031.

For coins that are not currency or legal tender, the next issue is whether the coins are numismatic-type coins or bullion-type coins. Numismatic-type coins are coins exchanged in the marketplace only by numismatists, and are valued primarily for their rarity, as collector items. The value of numismatic-type coins is determined by their age, number minted, history, art and aesthetics, condition, and metal content. Coins that are bought and sold solely on the basis of their metal content are bullion-type coins. The IRS and courts have held that numismatic-type coins and bullion-type coins are not like-kind to each other.

For example, the exchange of United States $20 gold coins for South African Krugerrand gold coins did not qualify because the United States $20 gold coins were numismatic-type coins and the South African Krugerrand gold coins were bullion-type coins. The bullion-type gold coins, unlike the numismatic-type gold coins, represent an investment in gold on world markets rather than in the coins themselves. To the contrary, gold bullion exchanged for Canadian Maple Leaf gold coins was found to be like-kind.

A subsequent ruling involved the exchange of Mexican 50-peso gold coins for Austrian 100-corona gold coins. The ruling held that since the Mexican 50-peso gold coin and the Austrian 100-corona gold coin are no longer circulating mediums of exchange in their respective countries, that neither of the gold coins are currency (since money in its usual and ordinary acceptation is synonymous with currency). The differences between gold coins minted by one country and gold coins minted by another country, where such coins are not used as a circulating medium of exchange, are primarily of size, shape, and amount of gold content. The nature or character of the gold coins, however, is the same, and thus they qualify as “like kind” property. Therefore, the exchange of the Mexican 50-peso gold coins for the Austrian 100-corona gold coins qualifies under section 1031.

Another case addressed an exchange of silver bullion for gold bullion. In this case, the values of the silver bullion and the gold bullion were determined solely on the basis of their metal content. Although the metals have some similar qualities and uses, silver and gold are intrinsically different metals and primarily are used in different ways. Silver is essentially an industrial commodity. Gold is primarily utilized as an investment in itself. An investment in one of the metals is fundamentally different from an investment in the other metal. Therefore, the silver bullion and the gold bullion were held to be not like-kind property.

Each case must be looked at independently to determine the proper result. In any event, we are seeing more investors “Go For the Gold” and are taking advantage of section 1031 as a way to defer taxes. For more information about whether a particular investment will qualify for a like-kind exchange, contact All States 1031 Exchange Facilitator owner, F. Moore McLaughlin, Esq., CPA, CES® toll free at 877-395-1031 or visit our website at www.AllStates1031.com.