IRS amends regulations affecting like-kind property exchanges

Tim Whitney

The U.S. Internal Revenue Service has amended like-kind exchange regulations to add a definition of real property and limit section 1031 treatment to like-kind exchanges of real property.

The final regulations include a rule addressing a taxpayer’s receipt of personal property incidental to the real property the taxpayer receives in an otherwise qualifying like-kind exchange. In addition, the new section of the regulations classifies real property under the law of the state or local jurisdiction in which that property is located.

The regulations help clarify section 1031 amendments that occurred as part of the 2017 Tax Cuts & Job Acts and went into effect on Dec. 2, 2020.

By definition, real property generally includes land and such improvements to land as buildings and other inherently permanent structures and their structural components.

If permanently affixed to property, buildings can include apartments, office and retail buildings, hotels, houses, malls, motels and warehouses.

Other inherently permanent structures permanently affixed to real property can include  in-ground swimming pools; roads; bridges; tunnels; paved parking areas, parking facilities and other pavements; special foundations; stationary wharves and docks; fences; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunications cables; microwave transmission, cell, broadcasting and electric transmission towers; oil and gas pipelines; offshore drilling platforms, derricks, oil and gas storage tanks; grain storage bins and silos; enclosed transportation stations and terminals. 

Other assets not included above could be considered as well if they can meet the five factors test.

As I’ve previously noted, like-kind exchanges can involve a complicated process and the guidance of a team of professionals.

This team should include a reputable exchange facilitator to act as an intermediary and a good tax advisor or attorney to ensure the exchange is done correctly so it won’t be disallowed by the IRS.