The Treasury Department and Internal Revenue Service (IRS) on June 11 issued proposed regulations to implement a provision in the Tax Cuts and Jobs Act (TCJA) that limits like-kind exchanges to real property, including multifamily buildings. Importantly, the proposed regulations provide a definition of real property for purposes of like-kind exchanges, as well as a rule to account for personal property that is incidental to real property that a taxpayer receives as part of an exchange.
The proposed regulations define real property as including “land and improvements to land, unsevered crops and other natural products of land, and water and air space superjacent to land. Improvements to land include inherently permanent structures and the structural components of inherently permanent structures.” The proposed regulations provide that buildings are inherently permanent structures and specifically note that apartments are a type of building.
In addition to providing a definition for real property for purposes of like-kind exchanges, the proposed regulations also provide a rule to account for personal property that is incidental to real property that a taxpayer receives as part of an exchange. Under the proposed rule, personal property is incidental to real property if “the personal property is typically transferred together with the real property, and the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15 percent of the aggregate fair market value of the replacement real property.”
NMHC has long advocated for like-kind exchanges. Retained for real property as part of TCJA enacted in late 2017, like-kind exchange rules encourage investors to remain invested in real estate by allowing property owners to defer capital gains tax if, instead of selling their property, they exchange it for another comparable property. As long as the taxpayer remains invested in real estate, tax on any gain is deferred. When the taxpayer ultimately does sell the asset, the property tax is paid.
For more information on NMHC’s advocacy work regarding like-kind exchanges, please visit our advocacy page.
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