An update on like-kind exchanges

July 23, 2020

By Greg Bryant, Tax Insider

The recently released proposed regulations on Sec. 1031 like-kind exchanges (REG-117589-18) provide much needed clarification for taxpayers who have conducted cost segregation studies on exchanged properties. The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, removed personal property from part of the preferential deferred tax treatment for like-kind exchanges.

While most people understood the intent of that edict, it created some unintended consequences when property owners exchange real estate. Unless the exchange involved raw land, it was highly likely that some level of personal property would be “embedded” in a building — something that might have been identified in a cost segregation study. Note: Usually Sec. 1245 property (tangible personal property that may be depreciated) is broken out in a cost segregation study — not furniture, fixtures, and equipment.

To circumvent the disallowance of personal property being conveyed in a like-kind exchange, some taxpayers and their advisers implemented aggressive strategies to assign a significantly reduced basis of Sec. 1245 property. Those strategies often used a fair market value (FMV) without regard to the actual tax basis of the same assets calculated in a cost segregation study. This practice could prove to be problematic — especially under IRS examination.

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