IRS Issues Final Like-Kind Exchange Regulations

By Kenneth H. Bridges, CPA, PFS December 2020

Prior to enactment of the Tax Cuts and Jobs Act (TCJA) in late 2017, the IRC 1031 like-kind exchange rules applied not only to real estate, but also to tangible personal property which was used in a trade or business or held for investment.  TCJA changed the rules to restrict the favorable tax treatment to real estate only.

In June 2020, the IRS issued proposed regulations which defined, for the first time, the term “real property” for purposes of IRC 1031. Notably, those proposed regulations did not make reference to state and local law. However, based on comments received, the final regulations issued in late November do provide that property will be treated as real property for purposes of 1031 so long as classified that way under the applicable state and local law on the date of transfer.  Also, property will be treated as real property if specifically listed as such in the regulations or considered as such based on all of the facts and circumstances.

The regulations also include a safe harbor for incidental personal property acquired in an exchange if (1) in standard commercial transactions the personal property is typically transferred together with the real property, and (2) the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15% of the aggregate fair market value of the replacement property received.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.