Posted by Valerie Middlebrooks, CPA
The Tax Cuts and Jobs Act made modifications to the treatment of certain like-kind exchanges.
Old Law – Pursuant to Section 1031, a taxpayer has the option to defer gain or loss on an exchange of “like-kind” property. Both properties must be held for use in a trade or business or for investment purposes. Property eligible to be exchanged in a tax-deferred manner included real property and personal property, including intangible personal property such as patents and intellectual property. Eligible property did not include stock in trade, property held primarily for sale, or partnership interests. Property must be “like-kind” in nature either within the same general asset class or within the same product class and does not include property located outside the United States.
New Law – Effective for exchanges completed after December 31, 2017, the application of Section 1031 gain or loss deferral will only be available for exchanges of real property not held primarily for sale. Specifically, gain or loss may be deferred on the exchange of real property held for use in a trade or business or for investment if the real property is exchanged solely for other real property of a like kind. Personal property will no longer qualify for gain or loss deferral treatment. All other pre-existing guidance for Section 1031 remains in place.
For any exchange transaction where either the taxpayer has disposed of the relinquished property or acquired the replacement property prior to January 1, 2018, the new rules do not apply. Thus, if the first step of an exchange transaction of personal property took place prior to January 1, 2018, it can still qualify for deferral treatment if the other Section 1031 requirements are satisfied.