State law property classifications do not control "like kind" determination

In Chief Counsel Advice (CCA) 201238027, the IRS concluded that state law property classification does not control whether exchanged properties are considered of "like kind" for purposes of Sec. 1031. Rather, federal income tax law controls and requires consideration of all facts and circumstances, including state law and federal tax law classifications, as appropriate. Case law and administrative guidance addressing the like-kind standard of Sec. 1031 have often referred to state law property classifications, especially when considering exchanges of real property. However, the authorities were often unclear as to the exact role state law played in determining whether properties at issue were of a like kind, and which state law was relevant (e.g., those relating to property tax, sales tax, intestacy, etc.). This guidance should help taxpayers and advisers avoid absurd results from basing the like-kind determination solely on state law classifications.