IRS issues proposed like-kind exchange regs

Tax Hot Topics newsletter The IRS released proposed regulations (REG-117589-18) to define real property in the context of like-kind exchanges under Section 1031, and to provide a taxpayer-friendly safe harbor provision for personal property that is acquired incident to a like-kind exchange.

Under Section 1031, a taxpayer does not recognize gain on a like-kind exchange, unless it receives boot, which includes cash or property that is not of like-kind. Prior to the Tax Cuts and Jobs Act (TCJA), Section 1031 included exchanges involving both real and personal property to the extent that the property exchanged were the same class of property. The TCJA limited the nonrecognition treatment under Section 1031 to exchanges involving only real property.

Neither the Section 1031 nor the regulations thereunder have defined real property. There are various definitions of real property in the regulations for other purposes, but the IRS did not think any of them were appropriate in this context or that local law should be controlling.

The proposed regulations provide that, solely for purposes of Section 1031, real property is defined as land and improvements to land, unsevered natural products of land and water and air space superjacent to land. They provide a lengthy list of improvements to land, which includes buildings and their structural components, as well as other inherently permanent structures. If a property is not included on the list, the proposed regulations include a set of factors that taxpayers may use to determine whether it is an inherently permanent structure.

Many exchanges of real property may include components that are not real property under the proposed definition. For example, buildings may include structural components that are real property and equipment that is not real property. Therefore, the proposed regulations provide a taxpayer-friendly exemption for incidental personal property included in an otherwise qualifying like-kind exchange. If this rule applies, then incidental property is ignored in determining whether qualified replacement property has been identified in the exchange.

Personal property is incidental to real property acquired in an exchange if, in standard commercial transactions, the personal property is typically transferred together with the real property, and 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 real property.

Taxpayers may rely on the proposed regulations for any exchange of real property beginning after Dec. 31, 2017. However, the taxpayers will be required to apply the regulations to all exchanges beginning on or after the date the regulations are published as final in the Federal Register.

Sharon Kay
Washington National Tax Office
T +1 202 861 4140

Caleb Cordonnier
Washington National Tax Office
T +1 202 521 1555

Jason Seo
Senior Associate
Washington National Tax Office
T +1 202 521 1509

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.