Source Advisors


February 12, 2018 by Charles Duncan

Charles Duncan
Charles Duncan

On December 22nd, 2017, the President signed Public Law Number 115-97, known as the Tax Cuts and Jobs
Act (TCJA). This wide-ranging act has changed many familiar provisions of the Internal Revenue Code and added new ones. Section 13303 of the Tax Cuts and Jobs Act amended section 1031 of the Internal Revenue Code for exchanges of propertyafter December 31, 2017. Under the new law, only exchanges of real property will qualify for the tax benefits of deferring gain recognition via a Like Kind Exchange (“LKE”). These new rules apply to all exchanges started and completed after December 31, 2017. If the taxpayer had already sold the property to be relinquished in the exchange or had received the property to be acquired in the (reverse) exchange, the old rules apply. The new rules impact cost segregation in two main ways.

  1. Though it has been a long-standing position of Source Advisors, it is important to note that what constitutes real property for tax depreciation purposes is not identical to what constitutes real property for LKE purposes.
    • Real property for LKE purposes is determined by looking at state law, while real property for depreciation purposes is identified solely using Federal income tax laws developed for the former Investment Tax Credit.2
    • An asset may be personal property for depreciation purposes, but real property for LKE purposes. This is a complex area, especially since the Service ruled that, even though two assets may both be real property under state law, they still might not be like kind and that they could look at factors, such as their Federal income tax depreciation classification.3
  2. Even if taxpayers are not able to classify their section 1245 tangible personal property as real property for LKE purposes, the original cost segregation study for the relinquished property could be updated using an age-life or other method of discounting the section 1245 property. This approach, (which is required by the section 1245 regulations), would generally result in more FMV being allocated to the section 1250 real property and the land. This would help reduce the gain on the exchange of the personal property.

  1. 1 I.R.C. § 1031(a)(1) is amended by the 2017 Tax Cuts and Jobs Act § 13303(a).
  2. See, e.g. Oregon Lumber Co. v. Comm’r, 20 T.C. 192 (1953).
  3. C.C.A. 201238027 (Sep. 21, 2012).
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