New Limits for 1031 Exchanges Under the TCJA
posted Nov 12, 2018 by Parul Bansal in the Global Tax Blog
For years, taxpayers have used 1031, or “like-kind” exchanges to defer taxes on sales of appreciated business assets. The bad news is, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment….Learn more.
What is a 1031 exchange exactly?
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”.
In the past, the IRS was fairly flexible on what property could be exchanged under this break. For example, you could swap an apartment building for a strip mall. Or you could swap one business or investment property for multiple replacement properties. You could even exchange one business or investment property for a tenancy-in-common interest in a pool of larger properties.
What did the TCJA change?
Like kind exchanges were on the chopping block for a while, but the good news is the TCJA still typically allows tax-deferred like kind exchanges of business and investment real estate.
Unfortunately, for 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property.
Make note that: Prior rules that allow like kind exchanges of personal property still apply if one leg of the exchange was completed on or before December 31, 2017 while one leg remained open on that date. Be mindful that exchanged personal property has to be of the same product or asset class.
Gain or loss deferral is still allowed for real property.
Why the change?
Congress felt that tangible property owners are already benefiting from being able to deduct all of the cost of tangible property through the use of 100% bonus depreciation and section 179 deductions, so allowing them to also defer any gain or loss through a 1031 exchange is unfair.
Did the TCJA impact section 179 and bonus depreciation?
Check out our blog, “Tax Reform Update: Details of the Cost Recovery Provisions”
Essentially, the Section 179 limit has been doubled to $1 million (from $500,000 under prior law), and the phase-out threshold has been increased to $2.5 million. Both increases are permanent, though the amounts will be adjusted annually for inflation.
In addition, through 2022, the new law allows 100% expensing in the first year an asset is placed into service under the bonus depreciation program. (This deduction isn’t subject to any spending limits or income-based phase-out thresholds.) Starting in 2023, bonus depreciation percentages decrease by 20% annually. The program is generally set to expire on January 1, 2027, unless Congress takes further action.
The TCJA has brought significant changes to tax law and the rules for like-kind exchanges are complex. Our tax team can help you figure out if your exchange qualifies as a “like kind” one. Reach out today.
The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.