Big Changes to 1031 Exchanges, But Not for Real Estate (Yet)

Section 1031 of the tax code allows sellers of investment property to defer capital gains if the proceeds are reinvested in "like kind" property within certain timeframes. Prior to 2018, 1031 exchanges could be used for many kinds of property, including real estate, vehicles, artwork, and other tangible items.

Under the new federal tax law that took effect in late December, Section 1031 exchanges are no longer possible for any kind of property other than real estate. Both the relinquished property and the replacement property must be domestic; exchanges involving foreign property are not eligible (and were not eligible even before the new law).

Many sales of real property include personal property also, like machinery or furnishings. Now that personal property cannot get 1031 tax deferred treatment, parties to sales of combined real and personal property may need to reconsider how to allocate the purchase price among the various assets.

The loss of 1031 exchanges for personal property has been somewhat offset by new provisions allowing full expensing of tangible business property assets like machinery and hotel furniture. These provisions expire gradually – full expensing ends in 2022, with gradual reductions until it fully expires in 2027.

Section 1031 exchanges have spawned an entire industry of brokers and exchange accommodators that specialize in these complicated transactions. It will be interesting to see how the industry is affected by these changes. The industry itself certainly understood big changes were possible as the bill was being negotiated; you can see some of their legislative efforts here.

This blog is not tax advice. If you are involved in, or are considering, a 1031 exchange, you should consult with your tax advisor regarding the potential advantages under the new tax law of foregoing the benefits of a like-kind exchange in favor of obtaining a new and presumably much higher basis in what would otherwise be replacement property with a carry-over basis.