1031 Exchanges and Tax Reform
What's In, What's Not
Since 2013 when former chair of the Senate Finance Committee, Max Baucus, talked about a possible tax plan that would significantly change 1031 to the Dave Camp tax bill introduced in 2014 that included a full repeal of Section 1031, 1031 CORP. and our industry colleagues have worried about the future of like-kind exchanges. Over the last few years, there have been countless Calls to Action to you and others who understand the importance of Section 1031 and hundreds of visits on Capitol Hill and in-district by 1031 practitioners, including many members of our 1031 CORP. team.
When the Tax Cuts and Jobs (the “ACT”) was signed into law by President Donald Trump on December 22, 2017, many 1031 practitioners breathed a sigh of relief but Section 1031 did not go unscathed. Real property exchanges were preserved. Real property includes everything from a single family rental property to a farm to conservation easements to an office building to oil and gas royalties. You can continue to sell more than one or acquire more than one. Unfortunately, personal property exchanges were repealed from Section 1031. This would include tangible and intangible personal property assets used for a trade or business, such as equipment, vehicle fleets, airplanes, livestock and furniture. These personal property assets may now be eligible for immediate expensing. The replacement asset can be new or used and must have been placed in service after September 27, 2017. There are concerns the phase out of immediate expensing starting in five years will create issues for business owners who traditionally completed 1031 exchanges.
Although likely unintentional, there are various types of personal property that fall through the cracks and do not qualify for tax-deferral treatment under Section 1031 and are ineligible for immediate expensing. This would include frequently exchanged assets such as franchise agreements, liquor licenses and distribution rights. These assets, when exchanged, often stimulate improvements on the replacement property, create more jobs and bring in additional local, state and federal tax dollars. Without the tax deferral, owners will likely not have the same amount of funds to invest in the replacement property. Also excluded are assets such as artwork, collectibles and coins.
We continue to follow these issues and the efforts to make additional changes and will keep you posted in future newsletters.