The Internal Revenue Service (IRS) is offering businesses and real estate investors clarity on like-kind exchanges in its proposed regulations (REG-117589-18) released on June 11, 2020, which defines “real property” for purposes of attaining tax deferral in such an exchange.

The passing of the Tax Cuts and Jobs Act (TCJA) limited like-kind exchanges to exchanges of real property held for use in a trade, business or investment, and not exchanges of person or intangible property. A transition rule in the TCJA provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before Dec. 31, 2017, or received replacement property on or before that date.

However, the proposed regulations offer an extensive definition of what qualifies as “real property” under Section 1031. Under the proposed regulations, real property includes:

  • Land and improvements to land
  • Unsevered crops and other natural products of land, water and airspace superjacent to the land
  • Any building or other structure that is permanently affixed to real property

Also included is some intangible property, such as a license, permit or other similar rights so long as it derives its value from real property or an interest in real property, is inseparable from that real property or interest in real property, and does not produce or contribute to the production of income other than consideration for the use or occupancy of space.

Doeren Mayhew’s dedicated Tax Group continues to monitor this proposed regulation. In the meantime, if you have any questions related to like-kind exchanges and what qualifies for your business, contact our tax advisors today.