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Under New Tax Law, 1031 Exchanges Limited to Real Estate Alone

The Tax Cuts and Jobs Act of 2017 was enacted into law late last month. And although there was some discussion, as tax reform proposals went through their various iterations last year, of either repealing 1031 or allowing full expensing of real estate, which would have essentially made those 1031 exchanges pointless, the final version of the bill left the 1031 rules intact — save for one notable change:

Starting in 2018, under the new law, tax-deferred exchanges under Section 1031 will be valid only for the buying and selling of real estate.

The change is set forth in Sec. 13303 of the tax reform bill, which contains the following language:

  • Section 1031(a)(1) is amended by striking ‘‘property’’ each place it appears and inserting ‘‘real property’’.

The result of this modification is that 1031 exchange treatment for “personal property” exchanges — such as buying and selling of tangible depreciable property, including aircraft, automobiles, and heavy equipment; or of intangibles, like patents and mineral rights — which have long been eligible for Section 1031 exchanges, will no longer be allowed. But for a taxpayer who sold their relinquished property on or before December 31, 2017, an otherwise valid like-kind exchange will still qualify, even if the replacement property is acquired during 2018. Similarly, an in-progress parking arrangement/reverse exchange might also qualify if the replacement property was acquired on or before December 31, 2017. However, the legislative language refers to the taxpayer and not to the parking entity (the exchange accommodation titleholder) as the acquirer, which calls into question what exactly the drafters had in mind.

Admittedly, for the average exchanger, this change won’t make a difference: commercial and investment real estate already makes up the great majority of 1031 exchange property, and the existing rules for forward and reverse exchanges of real estate under Section 1031 remain unchanged.

But if you plan to buy a new business jet in 2018, be prepared to pay tax on the sale of the old one.

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What do you want to exchange?

At NES Financial, we’ve put together an industry-leading track record of 1031 success, over thousands of transactions and more than 25 years in the business. Our in-house counsel developed significant IRC 1031 guidance while at the IRS National Office. And we’ve built a cutting-edge administration platform, called eSTAC, from the ground up to maximize transaction security and transparency.

If you’re considering a real estate exchange, you’ve come to the right place.  Give us a call or schedule a free consultation, with no obligation, by clicking below!

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