Final Regulations have been Issued for Section 1031 Like-kind exchanges

At a glance

• Main takeaway: The Treasury Department and IRS released final regulations on Section 1031, Like-Kind Exchanges. Qualifying taxpayers must complete Form 8824, Like-Kind Exchanges with their tax return for the year they transfer the property as part of a like-kind exchange.
• Impact on your business: In 2017, the enactment of the Tax Cuts and Jobs Act put significant limitations on property exchanges under Section 1031 and what classifies as real property.  
• Next steps: Before you consider a like-kind exchange,Aprio’s Real Estate Practice can help you determine if you qualify and guide you through the complexities of the final regulations.

Schedule a consultation with Aprio today

The full story:

The final regulations to Section 1031 Like-Kind Exchanges have been released by the Treasury Department and the Internal Revenue Service (IRS). In this article, we dive into these regulations to understand the limitations and what classifies as real property.

When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, the bill 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, 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 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. It’s important to 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 (IRC).

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.

Under state and local law, property that is personal property 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 the 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.

The bottom line

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. Aprio’s Real Estate Practice can guide you through the complexities of these regulations to determine if you qualify for like-kind exchanges.

Schedule a consultation with Aprio’s Real Estate practice today.