2B — February 22 - March 14, 2019 — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
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he s a l e o r e x - change of property is generally a tax- By Laura Riso, CPA, WithumSmith+Brown The effects of TCJA on Like-Kind Exchanges T
gains on all types of personal property, including intan- gible property. Exchanges of machinery, equipment, ve- hicles, intellectual property, artwork, and other personal and intangible business as- sets no longer qualify. The provision generally applies to exchanges completed after December 31, 2017. However, if one side of the exchange transaction (either the dis- position or the receipt of the exchange property) occurred before January 1, 2018, then the pre-TCJA rules will ap- ply. This provision could have an unexpected negative im- pact on certain exchanges of real property. If a taxpayer gives or receives property that is not like-kind property as part of a larger transac- tion, gain recognition may oc- cur. Property that is not like- kind property is called boot. Under the new provision, if an exchange of real property also includes ancillary per- sonal property, the personal property would be considered boot and could create a tax- able gain for the taxpayer. One potential solution to this issue is for a taxpayer to look
to the significant bonus de- preciation options available to mitigate that gain. An example of this issue is as follows. A transaction involving multi-unit apart- ment buildings may include personal property items such as appliances, furniture, and equipment. In this case, a reasonable allocation of the transaction proceeds must be made to the personal prop- erty, and income must be re- ported from the disposition of that property. Receiving boot triggers gain recognition if there is a realized gain (when the fair market value of the property received exceeds the tax basis of the property given up). The recognized gain is the lesser of the boot received or the realized gain. Taxpayers need to be aware of the effects of this new pro- vision before entering into future like-kind exchanges under Section 1031. As al- ways, please contact a mem- ber of Withum’s Real Estate Services Group if you have any questions. Laura Riso, CPA is a manager in the Princ- e t o n , N J o f f i c e o f WithumSmith+Brown.
able event. However , u n d e r IRC Se c - tion 1031, no gain or loss is rec- ognized if p r o p e r t y h e l d f o r
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productive use in a trade or business or for invest- ment is exchanged for property of a “like kind” which is to be held for productive use in a trade or business or for invest- ment, when certain pa- rameters are met. Section 1031 of the Internal Rev- enue Code has historically allowed taxpayers to defer gains on real or personal property exchanged for property of a “like kind” until the future sale of the replacement property. The Tax Cuts and Jobs Act of 2017 (TCJA) now limits the non-recognition treatment to only like-kind exchanges of real property (not held pri- marily for sale), eliminating the taxpayer’s ability to defer
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