Tax deferral afforded through Section 1031 like-kind exchanges has been under threat of repeal or being reduction for many years. A committee made up members from the Senate Finance Committee and the House Way and Means Committee known as The Joint Committee on Taxation have made such recommendations many time over the past few decades. Cutbacks to Section 1031 had been recommended as far back as President Clinton’s administration. In 1997, that administration suggested requiring exchanges to be limited to “same-kind” properties rather than like-kind (any kind of real estate is like-kind to any other type of real estate). It came as no surprise that the recent House and Senate proposals for tax reform chose to whittle down Section 1031 in order to raise tax revenues to offset some of the tax reductions contained in the reform plans.
Comprehensive tax reform is here, and Congress is moving the legislative text through its final stages. Final voting is expected before the end of the year, with the new legislation to become effective for 2018. With Section 1031 retained for investment and business use real estate, but repealed for personal property (equipment, autos, machinery, etc), the new legislation presents a unique opportunity for exchangers to permanently reduce tax liabilities. There’s a very short window. If the new tax legislation passes, Section 1031 exchanges of personal property will only be allowed on sales that occur through December 31, 2017.