Jessica L. Jeane, J.D.
Director of Public Policy & Communications
November 23, 2020
Treasury and the IRS have released final regulations for section 1031 like-kind exchanges. The final rules, T.D. 9935, released on November 23, address the Tax Cuts and Jobs Act’s (TCJA) (P.L. 115-97) limitation of section 1031 like-kind exchanges to those of “real" property held for use in a trade or business or for investment.
Under the final rules, section 1031(a), as amended by the TCJA, provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if the relinquished property is exchanged solely for real property of a like kind that is to be held either for productive use in a trade or business or for investment. Generally, as of January 1, 2018, exchanges of “personal” or “intangible” property such as vehicles, artwork, collectibles, patents, and other intellectual property do not qualify for nonrecognition of gain as like-kind exchanges.
Notably, the final regulations also revise the proposed regulations' (REG-117589-18), definition of “real property” to provide that property is classified as such for section 1031 purposes if, on the date it is transferred in an exchange, the property is considered real property under the law of the state or local jurisdiction in which that property is located (state and local law test). Additionally, the final rules revise the proposed definition of real property to eliminate, for both tangible and intangible properties, any consideration of whether the particular property contributes to the production of income unrelated to the use or occupancy of space.
As highlighted in IR-2020-262, to report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with their tax return for the year they transfer property as part of a like-kind exchange. The IRS states that this form helps taxpayers identify the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received. Additionally, the form helps compute the amount of gain that must be reported if cash or property that is not of a like-kind is involved in the exchange, according to the IRS.
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