After talking about it since before the 2016 elections, Congress passed the Republican tax reform bill, HR.1, the "Tax Cuts and Jobs Act" on Wednesday, December 20, 2017 and President Donald Trump signed the bill into law on December 22, 2017. The legislation will take effect January 1, 2018.
The bill preserves like-kind exchanges of real property in its current form. The definition of like-kind remains broad and liberal and any real property held for use in a trade or business or for investment can be exchanged under Section 1031.
Unfortunately, Section 3303 of the bill repeals like-kind exchanges for all personal property, such as machinery, equipment, vehicles, artwork, collectibles, and other tangible and intangible business assets. The acquisition of assets acquired and placed in service after September 27, 2017, and before January 1, 2023 will be eligible for 100% expensing.
In the legislative Section-by-Section Summary, Republican drafters of the bill argue that the proposed use of full expensing on tangible personal property would be equivalent to the benefits of Section 1031:
"The bill provides full expensing for most tangible personal property which provides a marginal effective tax rate of zero percent to fully expensed property, equating to the deferral that like-kind exchanges provide currently."
The repeal of personal property exchanges does, unfortunately, leave some assets ineligible for deferral under Section 1031 which don’t qualify for immediate expensing. While this list is not complete, a few examples of such assets include:
- Franchise agreements;
- Distribution rights;
- Liquor licenses;
- FCC licenses; and
- Artwork, collectibles and antiques.
Personal property exchanges can be initiated through December 31, 2017 and qualify for tax-deferral under current law. The relinquished property must be transferred to the buyer by the end of the year.
Are You Selling an Asset that Doesn’t Qualify for Immediate Expensing?
CONSIDER INITIATING YOUR 1031 EXCHANGE NOW - If you have an agreement in place to transfer personal property in 2018 and the asset will not qualify for immediate expensing, consider pushing your transfer date up and close this week to take advantage of the current law. Initiate your personal property exchange now or contact a member of our Exchange Team with any questions.
