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2017 Tax Act and Changes in Rules for Like-Kind Exchanges

An exchange of property, like a sale, generally is a taxable event. However, under Section 1031 of the Internal Revenue Code prior to the enactment of the 2017 Tax Act, no gain or loss is recognized if property held for productive use in a trade or business or for investment was exchanged for property of a “like-kind” which is to be held for productive use in a trade or business or for investment.  Under Section 1031, taxpayers could defer gain on simultaneous or deferred exchanges of real property, business assets, depreciable tangible property, and intangible property if the property received qualified as “like-kind.”

Under the 2017 Tax Act, for exchanges completed after December 31, 2017, the benefits of the like-kind exchange non-recognition of gain provisions are limited to real property, provided the real property is not held primarily for sale.  Thus, exchanges of tangible and intangible personal property will no longer qualify for non-recognition treatment.  Despite the change in rules, however, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017 or, in the case of a reverse exchange, the replacement property is acquired by the taxpayer on or before December 31, 2017.

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