Amid the myriad of changes in the new tax law, there is a change to what type of property can be exchanged under code Section 1031 as a qualified like-kind exchange.
Under Code Section 1031, a taxpayer can elect to not recognize gain if he/she exchanges qualified property for similar qualified property, or if the taxpayer sells qualified property and using a qualified intermediary, purchases new qualified property. The gain is not recognized on the taxpayer’s tax return; instead, the unrecognized gain merely reduces the tax basis in the new property. Using a like-kind exchange allows the taxpayer to defer the recognition of any taxable gain until the replacement property is sold.
Previously, taxpayers could take advantage of like-kind exchanges for both personal and real property as a means of deferring taxable gain. However, as of January 1, only real property will now qualify for 1031 exchanges.
Any exchanges of personal property that are entered into and still open at the end of 2017 will continue to qualify for like-kind treatment if they meet all the other requirements.
1031 Tax strategy
A common tax strategy when acquiring real property is to have a cost segregation study done to take advantage of the shorter tax lives for personal property (and this becomes even more attractive now with the 100% bonus depreciation provisions). But, if real property is later included in a 1031 exchange, the personal property identified in a cost segregation study can no longer be included in the exchange.
What’s staying the same?
All the other 1031 exchange rules remain unchanged in the new law:
- Exchanged property must be like-kind
- Replacement property must be identified within 45 days
- The exchange must be completed within 180 days
- A qualified intermediary may be necessary to keep a taxpayer from coming into control of sales proceeds
- Any cash or non-like property received in the exchange will cause the recognition of gain
Like-kind exchanges can still be an effective tax planning option, but going forward, they will apply to a somewhat narrower set of transactions.
Michael Anderson, CPA