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IRS Issues Proposed Regulations on Like-kind Exchanges

July 20, 2020

New proposed rules on 1031 or like-kind exchanges modify rule limitations brought on by the TCJA.

Thanks to the Tax Cuts and Jobs Act (TCJA) the section 1031 like-kind exchange rules are limited (subject to a transition rule) to exchanges of real property completed after December 31, 2017. Check out our blog, New Limits for 1031 Exchanges Under the TCJA. Recently the IRS released proposed regulations that reflect this change. Here are the details.

What is a like-kind exchange?

Section 1031 of the Internal Revenue Code (IRC) allows you to defer gains on real or personal property used in a business or held for investment if, rather than selling it, you exchange it solely for property of a like-kind.

What are the proposed rules?

Specifically, the proposed rules would amend existing regulations to add a definition of real property. The definition has been deemed consistent with legislative intent and includes:

(1) real property eligible for like-kind exchange treatment under pre-TCJA law and

(2) shares in a mutual ditch, reservoir, or irrigation company described in IRC section 501(c)(12)(A) if the state in which the company is organized views the shares as real property.

Additionally, the proposed regulations would include a rule addressing a taxpayer’s receipt of personal property that is incidental to real property received in the exchange.

Effective dates?

For exchanges beginning after December 31, 2017, taxpayers can rely on the proposed regulations if followed consistently and in their entirety.

Comments on the proposal are welcomed through August 11, 2020. Questions? Contact us.

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