Tax-deferred like-kind exchanges have been around for a long time – a very long time. In more or less their present form (excepting a significant change mentioned below), they have been a part of the income tax world for over 60 years – but the concept and vehicle go back even further, to some of the earliest days of income tax in the U.S., the 1920s.
Such a long-toothed and taxpayer-friendly provision is bound to earn a strong fanbase, and Section 1031 exchanges have done just that. Maybe they’re not the Led Zeppelin of tax provisions (can there be such a thing?), but they are well-loved by many who have relied upon the underlying rules to ease their income tax burdens for years. Flipping a real estate property at a gain and reinvesting in another property? Follow the appropriate steps, observe time restrictions, and defer that gain until another day (or do the same thing again later). Doing the same with business equipment, machinery, vehicles, etc.? Again, do it right, and tell the tax man to come back another day.
So if you change the rules of the game, you are prone to make waves (not unlike Zeppelin canceling tour dates? I’m either struggling with an inapt metaphor or dating myself…or both). And that is exactly what happened with the Tax Cuts & Jobs Act passed in December. The rules have changed in a very basic and critical way. Exchanges of real property (like the first example above) are still covered by the provision. Exchanges of personal property (like the second example): not anymore. That means the days of deferring gain on exchanges of equipment, vehicles, and other assets that basically are not either dirt or cemented/bolted to dirt are over. Definitively over.
The reason for such a clawback of the benefits of Section 1031? Simple: Congress both gives and takes away. This is the latter, while the former is in the form of the expanded and increased expensing options under the enhanced bonus depreciation and Section 179 expensing rules. That is another conversation.
So there it is: no more like-kind exchanges for personal property (i.e. anything that isn’t real property). Why are we mentioning this now? Well, we have discussed it in various forums all year long, but as we approach the end of the year, many taxpayers consider their various holdings and business assets and consider possible transactions, so we thought another reminder was in order. Also, clearly the complex rules regarding like-kind exchanges do still apply for real property, so the use of the property, the form and timing of the exchanges (both relinquishment and acquisition), handling of funds, and potential depreciation recapture in certain circumstances are still important considerations, so please seek the help of qualified professionals to advise you BEFORE engaging in a like-kind exchange.
Michael A. Carraway, Jr., CPA
Michael A. Carraway, Jr., is a partner with GranthamPoole PLLC and a recognized leader in the field of partnership and corporate taxation, having worked with many clients on entity and transaction structuring matters. He has also written, taught, and spoken on many topics in the area over the years and has served as a technical subject matter expert in several practices. Please contact Mike at firstname.lastname@example.org, www.linkedin.com/in/michaelcarraway, or 601-499-2400. CPA License # R2705
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.