Like-kind exchange rules define real property, incidental personal property

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Like-kind exchange rules define real property, incidental personal property

The IRS has issued final regulations that define what property qualifies for Sec. 1031 like-kind exchange treatment (T.D. 9935). The new rules are necessary because the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, removed personal property from qualifying for the deferred tax treatment for like-kind exchanges. T.D. 9935 finalizes proposed regulations (REG-117589-18) issued in June.

The IRS received 21 comments on the proposed rules and revised the regulations in response to some of those comments. Two of the issues addressed in response to comments are the definition of real property qualifying for the exchange and whether to retain the 15% test for incidental personal property that can qualify for the exchange.

The final regulations classify property as real property for Sec. 1031 purposes if the property is:

Determining that property is personal property under state or local law does not preclude the conclusion that property is real property if it is specifically listed in Regs. Sec. 1.1031(a)-3(a)(2)(ii) (which clarifies the definition of an inherently permanent structure by referring to property being permanently affixed to the structure) or Regs. Sec. 1.1031(a)-3(a)(2)(iii)(B) (defining structural components), or as real property under the facts and circumstances in Regs. Sec. 1.1031(a)-3(a)(2)(ii)(C) (other inherently permanent structures) or Regs. Sec. 1.1031(a)-3(a)(2)(iii)(B).

The IRS received a number of comments about the 15% test for determining whether property is incidental personal property that therefore does not disqualify a like-kind exchange. Personal property is incidental to real property acquired in an exchange if (1) in standard commercial transactions, the personal property is typically transferred together with the real property, and (2) 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 (15% limitation).

The final regulations include language to clarify that the 15% limitation is calculated by comparing the value of all of the incidental properties to the value of all of the replacement real properties acquired in the same exchange. The 15% limitation is not a bright-line test for determining whether a transaction fails to meet the requirements of an exchange under Sec. 1031. All of the facts and circumstances of the taxpayer’s situation are considered in determining if the exchange meets the requirements of Sec. 1031.

The regulations apply to exchanges beginning after the regulations are published as final in the Federal Register. (They have been sent to the Federal Register for publication, but a publication date has not yet been announced.) In addition, taxpayers may apply the proposed regulations, if followed consistently and entirely, for exchanges of real property beginning after Dec. 31, 2017, and before the date the final regulations are published as final.

Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

Research & References of Like-kind exchange rules define real property, incidental personal property|A&C Accounting And Tax Services
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