The Treasury Department and Internal Revenue Service (IRS) on November 23 issued final like-kind exchange regulations to implement a provision in the Tax Cuts and Jobs Act (TCJA) that limits like-kind exchanges to real property, including multifamily buildings. Notably, the final regulations make several taxpayer-favorable modifications to the proposed regulations.
First, the final regulations expand the definition of real property to include property considered real property under the law of the State or local jurisdiction in which that property is located. Of course, multifamily property in particular remains real property under the final regulations.
Second, the final regulations eliminate the so-called purpose or use test in the proposed regulations. That test would have denied real property classification to property that contributes to income unrelated to the underlying real property (e.g., a gas line serving only a fryer in a restaurant). The final regulations enable tangible property to qualify as real property to the degree it is permanently affixed to real property. Additionally, structural components are real property if integrated into an inherently permanent structure.
The final regulations also retain a rule in the proposed regulations to account for personal property that is incidental to real property that a taxpayer receives as part of an exchange. Under the 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.” The final regulations, however, provide additional flexibility to this rule and enable taxpayers to compare the value of all incidental property acquired relative to replacement real property acquired in the same exchange as opposed to on a property-by-property basis.
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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