Written by: Michelle Chlebowski, CPA
The Tax Cuts and Jobs Act law enacted in December 2017 includes updated limitations on Like Kind Exchanges available to taxpayers. The previous rules allowing for the deferral of gain on like-kind exchanges of tangible personal property have been modified, in general removing the ability to defer these gains. The primary logic of the new limitations is due to the increased and expanded rules over expensing tangible personal property and certain building improvements.
Under the newly enacted law, no gain or loss is recognized on the exchange of real property if that property is either held for productive use in a trade or business or held for investment. These rules apply if the real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.
Congress intended that real property eligible for like-kind exchange treatment under pre-Tax Cuts and Jobs Act law would continue to be eligible for like-kind exchange treatment. This can include certain partial interests in real property, remainder interests and life estates in real property, leaseholds of at least 30 years, perpetual water rights, coal and oil leases, royalty interests in oil, gas, and mineral rights, interests in certain trusts, and undivided fractional interests in real property.
It is important to note, the updated limitations on Like-Kind Exchanges do not apply if the property is disposed of by the taxpayer in an exchange prior to January 1, 2018 or received by the taxpayer in the exchange received before January 1, 2018. This means that if the first step in either a forward exchange or reverse exchange occurs before January 1, 2018 then the entire exchange can qualify as a tax-free like-kind exchange, assuming all other prior requirements under Code Sec. 1031 are satisfied.