Changes to 1031 Exchanges

This information was from my 1031 Exchange Specialist.  If you have any questions, don't hesitate to contact me!

The Tax Cut and Jobs Act was signed into law on December 22, 2017, and took effect on January 1, 2018. It is a complex modification to the Internal Revenue Code that will take businesses and individuals some time to fully understand, notwithstanding that it became effective just nine days after the President’s signature.

The new law retains Section 1031 for real estate exchanges. However, Section 1031 may no longer be utilized to defer taxes for transactions involving personal property.

Real estate exchanges are subject to the same rules and regulations as under previous law. The 45 day identification and 180 day exchange periods remain unchanged, as does the role of the Qualified Intermediary. All real estate in the United States, improved or unimproved, also remains like-kind to all other domestic real estate. Foreign real estate continues to be not like-kind to real estate in the U.S.

Personal property assets that can no longer be exchanged include intangibles, such as broadband spectrums, fast-food restaurant franchise licenses and patents; aircraft, vehicles, machinery and equipment, railcars, boats, livestock, artwork and collectibles. Transition rules permit a personal property exchange to be completed in 2018 if either the relinquished property was sold or the replacement property was acquired by the taxpayer during 2017.

Full expensing. The full cost of tangible business use personal property assets such as heavy equipment, farm machinery, vehicles and hotel furniture can be written off in the year that they are placed in service by the taxpayer. Although tax can no longer be deferred through like-kind exchanges for these assets, the full expensing deduction can be used to offset any capital gain or depreciation recapture recognized in that same or future years. Full expensing is temporary; it will expire in 2022, and will be reduced to 80% for assets placed in service in 2023, 60% for 2024, 40% for 2025 and 20% for 2026. This deduction applies to both new and used assets acquired by the taxpayer.