The Impact of the Tax Cuts and Jobs Act on 1031 Exchanges

The Tax Cuts and Jobs Act of 2017 was one of the most sweeping pieces of federal tax legislation in decades. It overhauled the federal tax code in numerous respects—making changes that were both beneficial and detrimental to taxpayers in all tax brackets. But, among all of the changes made under the Tax Cuts and Jobs Act of 2017, perhaps the most significant was the change to 1031 exchanges. As a result of these changes, it is now more important than ever for taxpayers to ensure that they work with an experienced 1031 exchange facilitator when buying and selling “like-kind” property.

How the Tax Cuts and Jobs Act of 2017 Impacts 1031 Like-Kind Exchanges

Prior to the enactment of the Tax Cuts and Jobs Act of 2017, Section 1031 of the Internal Revenue Code allowed taxpayers to conduct tax-deferred like-kind exchanges with both personal and real property. The definition of personal property eligible for like-kind exchange treatment under Section 1031 was extremely broad and included not only physical assets such as vehicles, aircraft, machinery, equipment, and artwork, but also intangible assets such as intellectual property, franchise rights, and broadband spectrums.

This allowed taxpayers to conduct like-kind exchanges in an extremely wide range of scenarios—provided that the personal property involved was held for business or investment purposes. By conducting a series of transactions, businesses and investors could defer tax on gains from the sale of both tangible and intangible assets indefinitely while also taking appropriate expense deductions along the way.

But this changed in 2017.

When President Trump signed the Tax Cuts and Jobs Act in 2017, he eliminated like-kind exchange eligibility for personal property. As soon as the law took effect on January 1, 2018, taxpayers were no longer eligible to defer gain on personal property transactions through 1031 exchanges. Instead, they were limited to conducting 1031 exchanges with qualifying real property.

This remains the case today.

Under the Tax Cuts and Jobs Act of 2017, taxpayers can only conduct 1031 exchanges when they meet the requirements for relinquishing real estate assets and buying replacement real estate assets within the strict timelines that apply. The properties involved must also be of “like kind,” meaning that they must be:

• “Of the same nature or character,” although they can differ in “grade or quality,” and,
• Either both located in the United States or both located abroad.

Even so, as we have discussed previously, nearly all types of real estate assets can qualify as being of “like kind” with any other. While the Tax Cuts and Jobs Act of 2017 eliminated like-kind exchanges for personal property, it preserved the broad applicability of Section 1031 to most types of business and investment real estate transactions.

Key Features of 1031 Exchanges that Remain Unaffected by the Tax Cuts and Jobs Act of 2017

Along with preserving the broad applicability of Section 1031’s “like-kind” provisions in real estate transactions, the Tax Cuts and Jobs Act left in place several other key provisions of Section 1031 as well. For example:

• Businesses and investors can still use Section 1031 to conduct exchanges involving partial interests in real estate (i.e., leaseholds of longer than 30 years, tenancies in common, remainder interests, life estates, mineral interests and royalty interests);
• Businesses and investors can still conduct partial 1031 exchanges that involve investing only a portion of the proceeds of the sale of relinquished property and receiving taxable “boot” in the transaction; and,
• Businesses and investors can still conduct delayed like-kind exchanges by executing multiple transactions with the assistance of a 1031 exchange facilitator.

Conducting a Compliant 1031 Exchange Under the Tax Cuts and Jobs Act

While 1031 exchanges involving real estate remain unchanged under the Tax Cuts and Jobs Act in many respects, there are various scenarios in which businesses and investors will need to be cognizant of the Act’s implications. For example, when selling a furnished commercial property such as a hotel or an industrial facility equipped with heavy machinery, the furnishings or machinery may now constitute “boot” in a subsequent 1031 exchange. This can have significant tax implications—and failing to pay any tax due can have significant legal implications as well. As a result, compliance is critical, and businesses and investors seeking to conduct like-kind exchanges should work with an experienced 1031 exchange facilitator to ensure that they are making informed decisions.

Speak with an Experienced 1031 Exchange Facilitator for Free

If you need to know more about how the Tax Cuts and Jobs Act of 2017 impacts 1031 exchanges in 2024 (or beyond), we invite you to get in touch. To schedule a free consultation, please call 888-872-1031 or contact us online today.