The IRS released proposed regulations defining property that can qualify for like-kind exchanges under changes imposed by the Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, some exchanges of personal property, such as licenses, aircraft and equipment would qualify for a 1031 like-kind exchange. After the passing of the TCJA, only real property qualifies for exchanges. These proposed regulations offer some clarity on the definitions of property in 1031 exchanges.
Real Property for Like-Kind Exchanges
Under the proposed regulations, real property includes:
- Land and improvements to land
- Unsevered crops and other natural products of land
- Water and air space superjacent to land
Land and Improvements
“Improvements to land” is a broad statement and is broken down as an inherently permanent structure and its structural components. Inherently permanent structures include buildings or other structures that are permanently affixed to real property for an indefinite period of time.
A structural component is any asset that is a constituent part of an inherently permanent structure. Structural components only qualify as real property if the taxpayer holds interest in both the component and physical space of the inherently permanent structure.
The proposed regulations list additional structural components and provide factors for determining whether components are structural components. These tests include:
- The manner in which the asset is affixed to the real property
- Whether the asset is designed to be removed or remain in place
- The damage that removal of the asset would cause to the item or real property
- Any circumstances that suggest the asset was not affixed for an indefinite period
- The time and expense required to move the asset
- Whether the component is listed during the construction of the building structure
Unsevered Crops and Natural Products
The proposed regulations state that unsevered natural products are generally real property. These products include crops, plants, timber, mines, wells and other natural products. These items are no longer considered real property when they are removed from the land.
An intangible asset is considered real property as long as the asset:
- Gets its value from the real property
- Is inseparable from the property
- Does not create income other than consideration for the use or occupancy of space
An intangible asset as real property would be a license or permit that is used solely for the use or occupation of land or permanent structure and is in the nature of the lease or ownership.
If you are considering selling your property and would like to further discuss what property is qualifying under the proposed regulations, contact an Anders advisor below. Learn how Anders works with the real estate and construction industries.All Insights