Many of us are familiar with the like-kind exchange rules, and if you are like me you might have an uncle who brags about saving thousands of dollars in taxes by utilizing the like-kind exchange rules under Section 1031. With the passing of the Tax Cuts and Jobs Act on December 22, 2017, the like-kind exchange rules were changed. Effective January 1, 2018, Congress limited the like-kind exchange rules to apply only to real property (i.e. land and buildings) not held primarily for sale. You can no longer exchange personal property (i.e. machinery, equipment, vehicles) or intangible property (i.e. patents and intellectual property) tax free and qualify for nonrecognition of gain or loss under the new rules.
The rules of a deferred exchange under Section 1031 have not changed for real property. You are still required to identify replacement property or properties within 45 days from the conclusion of sale and you must complete the transaction within 180 days from the conclusion of sale. Cash left over from a sale called “boot” is still taxed as a gain, which could be capital or ordinary in nature.
The change to Section 1031 is permanent and does not end on December 31, 2025 as many of the Tax Cuts and Jobs Act provisions do. The changes to the like-kind exchange rules have increased the need for tax planning to avoid being hit with unexpected taxes.