As changes were made to reduce taxes in some areas, such as the new corporate tax rate, others were made to offset the total cost of the law. Like-kind exchanges under Section 1031 fell into the latter category. If you used like-kind exchanges in the past, it will be important to note how the rules have changed since the TCJA went into law.

1. © Copyright 2018. CBIZ, Inc. NYSE Listed: CBZ. All rights reserved.
BY BENNETT BERG, CBIZ MHM, LLC
P
assing the 2017 tax reform law required a delicate
budget-balancing act. Congress sought to minimize
the long-term impact that the law commonly known
as the Tax Cuts and Jobs Act (TCJA) would have on the
federal deficit. As changes were made to reduce taxes in
some areas, such as the new corporate tax rate, others
were made to offset the total cost of the law. Like-
kind exchanges under Section 1031 fell into the latter
category. If you used like-kind exchanges in the past, it
will be important to note how the rules have changed
since the TCJA went into law.
Like-Kind Exchange Recap
Section 1031 exchanges are open to both individuals
and businesses with real estate held for investment,
rental income or business purposes. Taxpayers could
use the like-kind exchange rules to defer state and
federal income tax if they “swapped” appreciated real
or personal property for a similar type of property. The
state and federal income tax deferral on the taxable gain
of the initial property sale remained in place until the
replacement property was sold. For that reason, many
commercial real estate companies found the like-kind
exchange to be a useful tax-minimization tool.
The TCJA made changes to limit the use of the program,
and while it may not have a significant impact on
commercial real estate companies, taxpayers looking to
use a like-kind exchange will want to pay attention to how
the definition of like-kind has been changed.
Changing Definition
As under the previous rules, like-kind property in the TCJA
generally means that the property being exchanged is of
the same nature, character and class as the relinquished
property. So, for example, you could not sell a business
property and invest the gain from that sale into a
vacation home. Like-kind property in the pre-TCJA rules
included the following provisions:
■ ■ Real property is like-kind with all real property.
■ ■ U.S. real property is not like-kind with non-U.S. real
property.
■ ■ Personal property is like-kind with personal property,
so long as both are in the same asset class for
depreciation purposes.
(Continued on Page 2)
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Using Like-Kind Exchanges after the TCJA

2. (Continued from page 2)
The TCJA removes personal property from the list of
property eligible for like-kind exchanges under Section
1031. After Dec. 31, 2017, like-kind exchanges are
limited to real property held for productive use in a trade
or business or for investment, in other words, not held for
personal use or primarily for sale or exchange.
Other Updates
Other than the new limitations on the type of property
eligible, like-kind exchanges will continue to function as
they did prior to the TCJA. Deferred like-kind exchanges
must be set up as a swap, and they must involve an
independent, qualified intermediary (QI). The seller
transfers the title of the relinquished real property and
the assumption of debts to be paid as part of closing
to the QI prior to the sale of the relinquished property.
Additionally, the seller identifies, in writing, up to three
replacement properties for the QI to purchase within
45 days of transferring the relinquished property to the
QI. The QI must acquire and deed the seller at least
one identified property within 180 days of the property
transfer to the QI.
Taxable Gain Considerations
Although some taxable gain is deferred in a like-kind
exchange, commercial real estate companies may owe
taxes on gains in certain scenarios. Reinvesting less than
100 percent of the relinquished property sale proceeds
may trigger taxable gain. If the seller dies with a deferred
gain, no tax is due to the extent of the property’s value
the estate reports as of the date of death. A gift of
property during life, with a deferred gain, simply transfers
the deferred gain to the transferee.
Complex rules determine the taxable gain of some
like-kind exchanges. In some cases, an exchange with
a related party will cause a like-kind exchange to fail. If
debts assumed by the QI are greater than the debt the
seller assumes from the QI, that difference less any cash
paid creates “boot” and causes taxable gain to the extent
such gain is less than the total gain realized upon the
“sale” of the relinquished property. Any cash received at
the closing of the replacement property is also taxable
“boot” to the seller.
In other cases, the QI might wind up acquiring the
replacement property before he or she disposes of
the relinquished property. This is what is known as a
Reverse Exchange. Commercial real estate companies
may also wish to acquire newly constructed property
as replacement property in an exchange. Both of these
exchanges are complex to do under the IRS’s safe harbor
procedures and should be discussed and understood
prior to undertaking the exchange.
A real estate purchaser may want to conduct a cost
segregation study, especially with the new enhanced
depreciation benefits available under the TCJA. In that
case the purchaser should be aware that any subsequent
like-kind exchange of the real property will not include
amounts reclassified as personal property and
depreciated accordingly because the new law only allows
real property to qualify.
Commercial real estate companies may use an
installment sale as part of an exchange, but there are
special rules that apply and need to be reviewed and
understood.
Like-kind exchanges could be used to exchange or
acquire a fractional tenancy in common interest,
but taxpayers should consult the IRS’s safe harbor
procedures that apply.
Finally, exchanges involving a multimember partnership
or LLC when some partners or members want to cash out
and others want to exchange are very risky to structure
and difficult to accomplish successfully; these should be
thoroughly planned and executed.
It may be possible to plan for a like-kind exchange
involving a foreclosure or a deed-in-lieu of foreclosure. It
may also be possible to plan for a like-kind exchange by a
partnership or LLC over two tax years.
For more information about this and other tax and
accounting issues, contact Bennett Berg or your local
CBIZ MHM professional.
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Bennett Berg is a Tax Director in the
CBIZ MHM Chicago commercial real
estate practice. He can be reached at
312.602.6820 or bberg@cbiz.com.