The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. The TCJA limits deferral under IRC Section 1031 to real property that is not held primarily for sale. Exchanges of personal property, capital assets, intangibles and collectibles are no longer permitted.
The modification to IRC Section 1031 applies to exchanges completed after December 31, 2017. An exception is provided if the relinquished property is disposed of on or before December 31, 2017 or if the replacement property is received on or before December 31, 2017.
Additionally, the TCJA expands current law regarding 50% bonus depreciation to permit 100% full expensing for certain short-lived assets. This 100% deduction is allowed for specific properties acquired and placed in service after September 27, 2017 and before January 1, 2023. The expense deduction is then decreased over the next 5 years to: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2026. The full expensing regime is being promoted as one of the cornerstones of the law and a great economic stimulator.
Taxpayers engaging in IRC Section 1031 like-kind exchanges after December 31, 2017 will want to consider carefully the tax implications of any personal property that is sold along with their real property.
The most headline grabbing provision of the TCJA of course, is the reduction of the corporate tax rate from 35% to 21%. Additionally, the law provides new rules regarding the tax rates applied to pass-through entities. Certain pass-through entities will be entitled to deduct 20% of their “qualified business income” in order to avoid having all of the entity-level income taxed at individual income tax rates. The rules regarding what constitutes “qualified business income” and what kinds of businesses can take advantage of this favorable deduction are complex and require careful analysis.
It will undoubtedly take tax practitioners some months to work through and understand all of the nuances of the new law.
At Chicago Deferred Exchange Company, we are grateful that Section 1031 has been preserved for real estate and thank all of you for expressing your support for this valuable provision.