The Treasury Department and IRS have released final regulations to section 1031 like-kind exchanges.
The 2017 Tax Cuts and Jobs Act (TCJA) put significant limits on property exchanges under Section 1031 such as:
- Like-kind exchange is only applicable to exchanges of real property held for use in a trade or business or for investment
- Exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally did not qualify for nonrecognition of gain as like-kind exchanges
- An exchange of real property held primarily for sale does not qualify as a like-kind exchange
The final regulations make some substantial changes from the proposed versions – most notably by providing that state and local law can determine when property is real property for purposes of section 1031. Note the final regulations provide that the definition for real property is specific to section 1031 and not intended to be used for any other purposes of the Internal Revenue Code.
Under the final regulations, real property includes:
- Land and generally anything permanently built on or attached to land
- Property that is characterized as real property under applicable state or local law
- Certain intangible property, such as leaseholds or easements, qualifies as real property under section 1031
Property that is personal property under state and local law can still be considered as real property for section 1031 if it is specifically listed as real property in the regulations.
Property not eligible for like-kind exchange treatment prior to enactment of the TCJA remains ineligible.
The final regulations keep the incidental exception of personal property transferred in an exchange which does not exceed 15% of the fair market value of the aggregate fair market value of the replacement property received in the exchange.
To report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges with their tax return for the year they transfer property as part of a like-kind exchange.
Taxpayers are encouraged to plan like-kind exchanges with their RINA tax advisor to make sure they qualify.