Since its signing into law on December 22, 2017, the Tax Cut and Jobs Act has created a number of changes to the tax code, leaving many uncertain as to how the changes will impact their businesses. Section 1031 of the Code in particular saw a number of changes, outlined here.
Section 1031’s biggest change was the complete repeal of personal property exchanges. This section of the Code now exclusively refers to real estate assets, having been retitled, “Exchange of real property held for productive use or investment.”
Just as under the previous law, real estate exchanges continue to be subject to a number of rules and regulations. Both the role of the Qualified Intermediary and the 45-day identification and 180-day exchange periods remain the same, and all U.S. real estate (improved or unimproved) continues to be like-kind to all other domestic real estate, just as foreign real estate remains not like-kind to real estate in the United States.
However, personal property assets such as intangibles (like broadband spectrums, fast-food restaurant franchise licenses, and patents), aircraft, vehicles, machinery and equipment, railcars, boats, livestock, artwork, and collectibles can no longer be exchanged. Personal property exchange is only permitted under transition rules if the relinquished property was either sold, or the replacement property was acquired, in 2017 by the taxpayer.
The taxpayer can write off the full cost of tangible business use personal property assets in the year that they are placed into service. These personal property assets include such assets as heavy equipment, vehicles, hotel furniture, and farm machinery. The full expensing deduction can be used to offset any depreciation recapture or capital gain recognized in that same year or in future years. However, tax can no longer be deferred through like-kind exchanges for these assets. Full expensing will expire in 2022, and will be reduced to 80% for assets placed in service in 2023, 60% for 2024, 40% for 2025 and 20% for 2026. Both new and used assets acquired by the taxpayer are subject to this deduction.
If you still find yourself with questions about the changes to Section 1031 of the tax code and how they may affect you, the tax experts at Sousa & Weber, LLP would be more than happy to help. Contact us for more information on how this tax reform legislation impacts you and your business.