Final Regulations on Like-Kind Exchange Rules

What are CPAs thankful for during the week of Thanksgiving? How about some much needed clarity from the Treasury and IRS on Section 1031 exchanges?!

The final regulations, which were issued November 23, 2020, provide tests under which taxpayers can evaluate particular facts and circumstances to determine whether a specific property is considered real or personal property. The final regulations retain the basic approach and structure of the proposed regulations issued on June 12, 2020, with certain revisions.

The following changes were made to the definition of “real property”:

• The determination will rely upon the State or local law in which the property is located at the date of the transaction.
• The purpose-or-use test has been eliminated.
  • If tangible property is permanently affixed to the real property and will remain affixed for an indefinite period of time, the tangible property is considered to be a permanent structure and thus real property under Section 1031. What doesn’t matter to this definition? The purpose-or-use of the property, or whether it contributes to the production of income.
  • A structural component is characterized as real property if it is integrated into an inherently permanent structure. What doesn’t matter here? Whether the structural component contributes to the production of income.
  • Machinery and equipment are considered real property if they comprise an inherently permanent structure, a structural component, or are real property under the State or local laws in which the property is located at the date of the transaction.
  • With respect to intangible property, whether it produces or contributes to the production of income other than consideration for the use or occupancy of space is not considered in determining whether intangible property is real property for Section 1031 purposes. Please note that the purpose of the intangible property is still relevant to its determination as real property.

Other noteworthy items include:

• The final regulations referred to language provided in Internal Revenue Code §1.856-10(d)(2)(i) for the definition of “permanently affixed.”.
• A license, permit, or other similar right that is solely for the use, enjoyment, or occupation of land or an inherently permanent structure and that is in the nature of a leasehold, an easement, or a similar right generally is an interest in real property and thus is real property under Section 1031.

Phew, now time for some turkey. Tryptophan’s got nothin’ on these final regulations! Happy Thanksgiving, everyone!

Source: IRS.gov, Bloomberg Tax