Section Quick Links
President Biden’s Tax Proposals: President Biden has proposed to limit gain deferred under Section 1031. The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2021. The Biden proposal has not yet been drafted into a bill by Congress. You should let your Senator or Representative that you support retaining Section 1031 as part of any tax reform laws!
The proposal issued by the House Ways & Means Committee on September 13, 2021 does not contain any amendments to Section 1031. The proposal must still be passed by the full House of Representatives and then sent to the Senate Finance Committee for markup. Amendments to Section 1031 may be added as the legislative process goes forward.
Tax Reform and Section 1031: Section 1031 for real property was preserved under the 2017 Tax Reform Bill. As of 1/1/18, non real property assets are not eligible for tax deferral under Section 1031. The IRS has issued regulations on what constitutes real property for Section 1031 purposes (see discussion below). For depreciable personal property, such as equipment or aircraft, 100% bonus depreciation has somewhat replaced Section 1031. There is no similar provision for intangibles or collectibles and art.
COVID-19: The IRS issued an extension for Section 1031 deadlines due to the COVID 19 emergency. Deadlines falling between April 1 and July 15, 2020 were postponed to July 15, 2020. The IRS issued an FAQ on August 11, 2020, indicating that there will not be any further extensions related to COVID 19.
Recent Guidance and Rulings
November 2020: Final Regulations Defining Real Property: The IRS issued final regulations defining real property for Section 1031 purposes. Final real property regulations. final real property regulations
January 2020: California Office of Tax Appeals Denies Mitchell Rehearing. OTA declined to rehear the Mitchell case, in which the taxpayer won a Drop and Swap challenge by the FTB. Mitchell Case from California
August 2016: Bartell v. C.I.R. Tax Court Approves Non Safe Harbor Reverse Exchange. In this Tax Court decision, a 17 month reverse construction exchange using an exchange facilitator. The IRS issued a non-acquiescence to the decision in August 2017. Read full analysis
IRS Disaster Tax Relief:
Revenue Procedure 2018-58, Section 17, provides an extension to the 45 and 180 day exchange deadlines in certain circumstances, including federally declared disasters. The extension is for the longer of the extension date listed in the IRS notice, or 120 days after the applicable exchange deadline. (But a deadline cannot be extended beyond the due date, including extensions, of the tax return for the year of disposition of the relinquished property). Generally, the taxpayer must be located in one of the designated counties, regardless of where the relinquished property or replacement property is located, or the taxpayer must otherwise have difficulty meeting the exchange deadlines under the conditions in Revenue Procedure 2018-58, Section 17. Also, the relinquished property must have been transferred, or a property must have been acquired by the EAT in a reverse exchange under Revenue Procedure 2000-37, on or before the declared disaster date.
For the most up-to-date information on IRS granted tax relief in disaster situations, please refer to the IRS website.