The Tax Cuts and Jobs Act of 2017 and its Effects on 1031 Exchanges

The Tax Cuts and Jobs Act of 2017 (TCJA) that took effect on January 1, 2018 was a major overhaul of the Internal Revenue Code. Late in 2017, while changes to Section 1031 were being contemplated by Congress, Accruit posted this blog article concerning some of the proposed amendments or even total repeal of Section 1031 being contemplated in Washington, D.C. and the potential adverse effects on tax deferred exchanges.

Fortunately, the TCJA passed by Congress and signed into law by the President generally preserved like-kind exchanges under Section 1031 of the Code. Although Section 1031 has been around for nearly one hundred years, the TCJA now limits the non-recognition treatment to only like-kind exchanges of real estate. While 1031 exchanges relating to real property remain unchanged, the TCJA completely eliminates the ability of a taxpayer to defer the gain on all types of personal property assets after January 1, 2018, such as:

  • Aircraft
  • Railcars
  • Franchise and dealership rights
  • Art and other collectibles
  • Equipment and machinery
  • Off-lease assets
  • Patents and other intellectual property
  • Vehicles, trucks and trailers

As a result of personal property now being excluded from Section 1031 exchanges under the Code, the taxpayer could realize a sizable gain in exchanges of real property that include a significant amount of personal property. For example, transactions involving multi-unit apartment buildings, hotels and restaurants may include substantial personal property to be conveyed in addition to the real estate.

Although the real property may qualify for a 1031 like-kind exchange, the personal property transferred with the real estate cannot be simply disregarded under the TCJA. The taxpayer will need to allocate the portions of purchase price attributable to the real estate and personal property. Unfortunately, the personal property included would likely be considered taxable “boot” in the real property exchange. In such instances the taxpayer should consider the TCJA bonus depreciation and immediate expensing provisions. The accelerated depreciation rules can take much of the sting out to the inability to do an exchange for personal property

Interestingly, the changes implemented by the TCJA also materially affect the world of professional sports. Pro sports teams that trade players are seen as effectively trading those players’ contracts which are regarded as assets for tax purposes. Consequently, it is possible that sports franchises may seek to trade fewer players now that they can no longer use Section 1031 for like-kind exchanges to make player trades on a tax-deferred basis and have to pay taxes each time they make a trade.

Congress enacted significant changes to the like-kind exchange rules under Section 1031 by way of the TCJA. The removal of personal property from like-kind exchanges has adversely affected many taxpayers and greatly impacted other industries. There are no guarantees that will not revisit the notion of repealing Section 1031 exchanges altogether. It is more important than ever before to consult with your legal and tax professionals, as well as the professionals at Accruit, as soon as possible concerning the new law and its impact on your next like-kind exchange of real estate.