On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act, enacting sweeping changes to the U.S. tax framework which took effect at the beginning of 2018. The new tax framework had one major change to Section 1031 of the IRS tax law: no longer can personal property, including franchise licenses, machinery and equipment, and vehicles, be exchanged to avoid capital gains taxes on the transactions.
The change is set forth in Sec. 13303 of the tax reform bill, which contains the following language:
- Section 1031(a)(1) is amended by striking ‘‘property’’ each place it appears and inserting ‘‘real property’’.
If you’re a taxpayer who sold your personal property on or before December 31, 2017, you can still qualify for the like-kind exchange if the replacement property is acquired during 2018.
Property investors were relieved to learn that the federal tax law preserved the provision for real estate used in a business or as investment, which some experts had predicted was at risk as lawmakers hammered out the final details. Under the new law, the only exchanges that will qualify for tax deferral under Section 1031 will be the buying and selling of real estate. Commercial and investment exchanges already made up the large majority of 1031 transactions, and the new tax law will leave the rules and regulations regarding these transactions unchanged.
1031 exchanges have been an important tool in the commercial real estate investors’ toolbox. It allows an investors to maximize the size of their portfolios by leveraging capital improvements, increased occupancy and higher rents.
Through these like-kind exchanges, investors can defer tax on their capital gains, and therefore put more capital into opportunities existing in today’s real estate market, such as the demand for health care support facilities, or entering a new geographic market targeted for its growth potential.