The “Tax Cuts and Jobs Act,” effective January 1, 2018, preserved Section 1031 like-kind exchanges for real property assets and the role of the Qualified Intermediary (QI) as exchange facilitator. The legislation repealed Section 1031 exchanges of personal property assets.
Definitions, Compliance, and Transitions
The “Tax Cuts and Jobs Act” (Summary – Full Text) changes only the type of assets that qualify for Section 1031 tax deferral. The definitions of “like-kind” and eligible property remain strict. For real estate assets, the qualifications and compliance rules follow existing rules. Personal property assets, such as machinery and heavy construction equipment; tractors, combines, and other farm equipment; livestock; fleet and business-use vehicles; aircraft; artwork and collectibles; fast-food franchises; and intangibles, like patents, are no longer eligible. Transition rules apply to personal property exchanges.
Real Estate Assets: Real estate exchanges are subject to the same rules and regulations as under previous law. The 45-day identification and 180-day exchange periods remain unchanged. All real estate in the United States, improved or unimproved, also remains like-kind to all other domestic real estate. Foreign and domestic property are not interchangeable. There are no new considerations on the real estate portion of the provision.
Personal Property Assets: At midnight, December 31, 2017, Section 1031 like-kind exchanges no longer applied to personal property assets. However, transition rules allow a 1031 client to complete an exchange of personal property initiated before January 1, 2018. A taxpayer is permitted to complete a personal property exchange providing the taxpayer 1) began the exchange in 2017, AND 2) EITHER i) sold the relinquished property by December 31, 2017, OR ii) acquired the replacement property by December 31, 2017. The legislation does not reference the acquisition of replacement property by an EAT; the law specifies that the taxpayer must have acquired the replacement property to be eligible for the transition rule. QIs should encourage clients with personal property to discuss immediate expensing or increased Section 179 opportunities with a CPA.
Full Expensing: A taxpayer can write off the full cost of tangible business-use personal property assets, such as heavy equipment, farm machinery, vehicles, and hotel furniture for the year the assets are placed in service. Like-kind exchange benefits no longer apply to these assets, but taxpayers can use the full expensing deduction to offset capital gain or depreciation recapture recognized in the same or future years. Full expensing is temporary, and will expire in 2022. The benefit will be reduced to 80% for assets placed in service in 2023; 60% for 2024; 40% for 2025; and 20% for 2026. This deduction applies to both new and used assets acquired by the taxpayer.
New Structures and Conflicts
QIs and the like-kind exchange industry will need considerable time to understand the impact of the law. FEA encourages QIs to become familiar with the new depreciation provisions, the new corporate and individual tax rates, 100% immediate expensing for business assets, and provisions for pass-through businesses that will affect exchange clients, investors, businesses. New Treasury Department rulings will offer guidance on compliance issues.