1031 Exchanges – Post the Tax Cuts and Jobs Act:
Utilizing a §1031 exchange, or like-kind exchange; provides for an opportunity to divest portfolios, change-up assets, or modify income streams within real estate without realizing tax implications of gain recognition. This provision has been in existence for quite some time and is a popular tool for deferring gain or historically, upgrading items of equipment without negative tax implications.
The Tax Cuts and Jobs Act of 2017 modified §1031, allowing for exchanges of real property only. Historically, various industries utilized §1031 to upgrade items of equipment. Post the 2017 tax legislation, exchanging equipment is no longer allowed under the provisions of §1031. Practically speaking, the economic impact of removing the ability to exchange items of equipment is minimal as in most cases, placing-in-service replacement equipment will allow for 100% bonus depreciation. As with any modifications to tax law, a period of uncertainty is present and tends to cause questions to be raised as to what the impact of the changes may actually be. Although it is true that items such as vehicles and equipment are no longer eligible to be exchanged through the deferral provisions of §1031, the question arises as to the definition of real property as it relates to real estate.
The definition of “personal property” varies between the depreciation and §1031 provisions of the Code – §1031 reading to be mainly items of furniture, fixtures, and equipment; the personal property that generally is not identified as part of the cost segregation study. A cost segregation study focuses on the identification of personal property that is affixed to the building; namely other items of equipment or fixtures that are not identified as furniture and fixtures and are outside of the personal property definition of a §1031 exchange. As a result, it is believed that a cost segregation study may still be utilized on property exchanged through the provision of §1031.
If you are looking at a §1031 exchange, it may be worthwhile to consider cost segregation to fully maximize the benefit available to you. In addition, it is important to fully understand the requirements to satisfy the gain deferral allowed under §1031; namely the timing requirements and the satisfaction of the like-kind requirements. In addition, the intricacies of §1031 can provide for convoluted calculations in determining the tax impacts of these transactions that are important to understand to avoid any unintended consequences.
If you are considering a §1031 exchange; please contact your Lurie advisor.