6C — December 18 - January 14, 2020 — Industry Leaders — Owners, Developers & Managers — M id A tlantic Real Estate Journal


Industry Leaders

By Brian T. Lovett, CPA, CGMA, JD, Withum IRS Releases Final Regulations on Sec. 1031 Like-Kind Exchanges


he Tax Cuts and Jobs Act of 2017 (“TCJA”) made significant chang -

number of questions about what would qualify as “real property” eligible for Sec. 1031 deferral in the eyes of the IRS, as that term is not defined in Sec. 1031. In Proposed Regulations is- sued in June 2020, the IRS attempted to provide a defini - tion of real property for Sec. 1031 purposes and outlined a purpose or use test that looked to the function of the prop- erty in question in determining whether the property was real property eligible for Sec. 1031. In response to the Proposed Regulations, the IRS received a number of comments contend-

ing that the purpose or use test would improperly narrow the scope of definition of real prop - erty and may treat property that has long been considered “real property” as not eligible for like-kind exchange. In Final Regulations issued recently, property will be con- sidered real property if it is specifically listed in the Regula - tions (including land, improve- ments to land and inherently permanent structures), if the property is considered real property under state or local law, or if it is considered real property based on all the facts

and circumstances as outlined in the Regulations. The Regu- lations include numerous ex- amples that help to lend some clarity to the IRS position on the issue of real property. Another issue raised by the change in the TCJA is the idea of like-kind exchanges involv- ing some amount of non-like kind personal property. In exchanges of real property, there is occasionally some per- sonal property that comes along with the real property. In light of the change in TCJA to limit exchanges to only real property, there was concern

that the inclusion of some per- sonal property would taint the exchange of real property and make it ineligible for like-kind exchange treatment. To address this concern, the final regulations provide an incidental property rule that allows a certain amount of incidental personal property to be received without invali- dating the like-kind exchange. According to the Final Regula- tions, the personal property will be considered incidental to real property acquired if the personal property is typically transferred together with the real property and the aggre- gate fair market value of the personal property does not ex- ceed 15% of the aggregate fair market value of the replace- ment property or properties. While the receipt of inciden- tal personal property will not invalidate the like-kind ex- change, it is important to note that the personal property may result in some tax on the transaction. The preamble to the Final Regulations confirms that any incidental personal property received would still be considered taxable “boot” received in the exchange un- der the provisions of Sec. 1031. The Final Regulations pro- vide some much-needed cer- tainly for taxpayers seeking to complete Sec. 1031 exchanges after TCJA. Brian T. Lovett, CPA, CGMA, JD is a Partner at Withum. MAREJ PEEK Props. secures construction loan for classAQOZ multifamily project in Orange, NJ ORANGE, NJ — PEEK Properties (PEEK) has se- cured $9.75 million in con- struction financing for the first of three new-construction Qualified Opportunity Zone (QOZ) multifamily properties in the City of Orange. The loan, which was ar- ranged by Meridian Capital and Bogota Savings Bank , is designated for the construc- tion of 50 class A market-rate units at 276 Reock St., in the city’s Reock Street Redevel- opment Area (RSRA). PEEK Reock I QOF, LLC kicked off its initial fundraising last summer and recently con- cluded its final phase of equity and debt fundraising. MAREJ

es to types of property that qualifies for l i k e - k i n d e x c h a n g e t r ea tmen t . Specifically, a f t e r t h e TCJA, only real property

Brian T. Lovett

qualified for tax deferred ex - change under Sec. 1031. This substantially reduced the num- ber of transactions Sec. 1031 could apply to, but also led to a

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