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IRS Proposes Consolidating Section 1031 Like-Kind Rules

Jul 03, 2020 by Marc Rapport

Real estate investors have until Aug. 11 to submit their comments about proposed changes in Section 1031 of the tax code that governs like-kind exchanges.

Those exchanges act as a powerful tax benefit, allowing investors to in effect indefinitely defer paying taxes for capital gains on property sales as they exchange one property for another.

Rules include 45 days to identify a new acquisition and closing either within 180 days of the sale or within the due date of the tax return year of the sale. "Like-kind" properties also are part of the rules; you're required to replace one kind of investment property with another. (This Millionacres article has the updates on pandemic-related extensions to these deadlines.)

Bringing like-kind rules into Section 1031

The IRS proposed Section 1031 changes last month that add rules around like-kind property held for business, trade, or investment purposes. Currently, those definitions must come from elsewhere in the tax code.

Here is the proposed rule as published in the Federal Register. As mentioned, comments will be accepted through Aug. 11.

Along with defining real property, the new rules lay out how certain receipts of personal property incidental to the real property received should be treated by the tax code.

Some context from a tax lawyer

Robert Kiggins, the tax chair for Culhane Meadows in New York, provides some context about the proposed changes to help inform Millionacres readers who may want to offer their opinion to the regulator or would just like to be informed about what to expect.

First, Kiggins says, the proposed changes should make it clearer which property will qualify for a tax-deferred, like-kind exchange of real property under Section 1031. "Basically, the treatment of certain personal property involved in an exchange which could have complicated the tax treatment of the exchange would be clarified," the New York attorney says.

"This should leave less guesswork as to whether the presence of an item that might be regarded as personal property would reduce, or eliminate, tax benefits of the exchange."

The three main takeaways

In sum, Kiggins says:

  • The proposed regulations amend the existing regulations to add a definition of real property to reflect statutory changes limiting Section 1031 to exchanges of real property.
  • The proposed regulations also provide a rule addressing a taxpayer's receipt of personal property that is incidental to real property the taxpayer receives in the exchange.
  • The proposed regulations affect taxpayers who exchange business or investment property for other business or investment property and who must determine whether the exchanged properties are real property for purposes of Section 1031.

Kiggins says these changes should give investors greater certainty about the tax outcome of a given proposed 1031 exchange.

"Nonetheless," he adds, "it will remain important to engage in thorough due diligence to get all of the facts and circumstances regarding any potential item of personal property which would be part of a 1031 exchange."

A matter of tax timing

Kiggins points out that the proposed new regulations apply to exchanges beginning on or after the date they're published as final regulations in the Federal Register.

"Pending issuance of the final regulations, a taxpayer may rely on these proposed regulations, if followed consistently and in their entirety, for exchanges of real property beginning after Dec. 31, 2017, and before the final regulations are published," he said.

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