Proposed regulations define real property under Section 1031

Overview

Section 1031 provides nonrecognition treatment for certain exchanges of like-kind property.  The 2017 tax reform act amended Section 1031, for exchanges completed after December 31, 2017, to limit nonrecognition treatment to exchanges of real property.  Before amendment, Section 1031 provided nonrecognition treatment for personal property and intangible property as well as real property, while disallowing exchanges of partnership interests, stock, inventory, and several other types of property.  Property must be held for use in a trade or business or for investment and not held primarily for sale.

The IRS and Treasury have released proposed regulations under amended Section 1031 defining ‘real property.’  The preamble to the proposed regulations provides that (1) the proposed regulations apply to exchanges beginning on or after the date of publication of final regulations, and (2) taxpayers may rely on the proposed regulations until final regulations are published if they apply all of the proposed rules consistently.

The takeaway

The determination of whether property is real or personal has taken on additional significance as a result of the tax reform amendments to Section 1031.  The proposed regulations provide a Section 1031 definition of real property that draws from several Internal Revenue Code sections but indicate that no inference is intended for other purposes. As a practical matter, taxpayers may need to consider whether property that has been characterized as personal for other purposes qualifies as real property for like-kind exchange purposes.