Tax reform & 1031 exchanges

Impact:

Section 1031 Like Kind Exchanges have been historically permissible to defer gain on the exchanges of property taxpayers hold for use in their trade/business or for investment purposes. Before the TCJA limited Section 1031 to real property, this tax opportunity existed for qualified personal property including airplanes, art work, collectibles, heavy equipment, autos/trucks and intangibles such as franchise licenses.

Tax planning opportunities:

In certain asset classes such as multifamily, there can be significant value in what is thought of as personal property included in a housing project. Upon the disposition of real property and in consideration for engaging in a Like Kind Exchange, taxpayers should work with their advisors to understand the definition of what is real property vs. personal property under applicable state law. For example, in an apartment building, would a dishwasher that is affixed to the floor and inserted in or next to installed cabinetry be deemed personal property or real property? The determination as to what is considered real property under state law (not its tax deprecation classification) is essential to successfully executing a Like Kind Exchange.

The determination as to what is considered real property under state law (not its tax deprecation classification) is essential to successfully executing a Like Kind Exchange.

If a taxpayer finds himself in a situation where a portion of the relinquished property unavoidably meets the definition of personal property, timing of the new property acquisition is critical. For example, in the Construction industry, heavy construction equipment is disposed of and new equipment is purchased regularly. In the past, the gain generated in these transactions could be deferred through a Section 1031 exchange. Now that personal property such as equipment does not qualify for gain deferral under Section 1031, the tax is paid upon the sale. However, purchasing and placing into service the new or used equipment in the same tax year, will allow for immediate expensing of the new equipment, which will generally offset the gain recognition. Under the new tax law through 2022, 100% bonus depreciation is allowed for all new or used shorter‐lived assets which are acquired and placed in service after September 27, 2017.