The Internal Revenue Service and the Treasury Department have issued their final regulations on section 1031 like-kind exchanges. The regulations clarify the definition of real property under section 1031, while providing a rule governing the receipt of personal property incidental to real property in a like-kind exchange.

TCJA Limits Focus of Like-Kind Exchange

Legislation passed into law in 2017 as part of the Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property.

As of Jan. 1, 2018, exchanges of personal or intangible property -- such as vehicles, artwork, collectibles, patents, and other intellectual property -- generally do not qualify for the same treatment of gain as do like-kind exchanges.

In addition, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. An exchange of real property held primarily for sale doesn’t qualify as a like-kind exchange.

Under the final regulations, “real property” includes land and generally anything built on or attached to the land. As a rule, real property also includes property considered real property under state or local law.

Certain intangible property, such as leaseholds or easements, also qualifies as real property under section 1031.

It should be noted that property that wasn’t eligible for like-kind exchange treatment before the TCJA was passed remains ineligible. Neither the TCJA nor the final regulations change whether those properties are of like kind.

Reporting an Exchange

To report a like-kind exchange, taxpayers file a Form 8824, Like-Kind Exchange. The form should accompany the filer’s tax return for the year property was transferred as part of a like-kind exchange.

The Form 8824 helps taxpayers figure the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received.

The form also helps taxpayers calculate the amount of gain they must report if cash or property that is not of a like-kind is involved in the exchange.

For more information about like-kind exchanges and other tax reform changes, visit IRS.gov/TaxReform.

Source: IR-2020-262