Like Kind Exchange Regulations

calendar iconDecember 11, 2020

The Tax Cuts and Jobs Act (“TCJA”) amended section 1031 to limit its application to exchanges of real property for exchanges completed after December 31, 2017, subject to a transition rule for certain exchanges in which property had been transferred before January 1, 2018.  The Treasury Department and IRS recently issued final regulations to implement these statutory changes by adding a definition of real property and adapting an existing incidental property exception to apply to a taxpayer’s receipt of personal property that is incidental to real property received by a taxpayer in an exchange.  These final regulations generally apply to exchanges beginning after December 2, 2020.

Definition of Real Property

The term “real property” under section 1031 and the regulations thereunder means land and improvements to land, un-severed natural products of land, and water and air space superjacent to land.  An intangible interest (such as fee ownership, co-ownership, a leasehold, an option to acquire real property, an easement, land development rights, stock in a cooperative housing corporation, or shares in a mutual ditch, reservoir or irrigation company) in such real property is also considered real property.  Furthermore, property that is considered real property under state or local law (in the jurisdiction in which the property is located) is treated as real property under section 1031.

The term “improvements to land” means inherently permanent structures and the structural components thereof.  Any building or other structure that is a distinct asset and is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time (based on all the facts and circumstances) is considered an inherently permanent structure.

The final regulations state that buildings include houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping malls, factories, office buildings, warehouses, barns, enclosed garages, enclosed transportation stations and terminals, and stores.  Other inherently permanent structures include the following distinct assets (if permanently affixed): in-ground swimming pools, roads, bridges, tunnels, paved parking areas, parking facilities, other pavements, special foundations, stationary wharves and docks, fences, inherently permanent advertising displays, inherently permanent outdoor lighting facilities, railroad tracks and signals, telephone poles, power generation and transmission facilities, permanently installed telecommunication cables, microwave transmission, cell, broadcasting and electronic transmission towers, oil and gas pipelines, offshore platforms, derricks, oil and gas storage tanks, and grain storage bins and silos.

The regulations also provide a definition of structural components, numerous examples thereof, and factors to be considered if a component of a building or inherently permanent structure is not specifically listed as a structural component.

Incidental Property Exception

The final regulations address the receipt of personal property that is incidental to the taxpayer’s replacement real property in an exchange.  The incidental property rule provides that, for exchanges involving a qualified intermediary, personal property that is incidental to replacement property is disregarded in determining whether a taxpayer’s rights to receive, pledge, borrow or otherwise obtain the benefits of money or non-like-kind property held by the qualified intermediary are expressly limited.

The purpose of the incidental property rule is to provide assurance to taxpayers that a qualified intermediary’s use of exchange proceeds to acquire incidental personal property will not cause the taxpayer to fail to meet the requirements of section 1031.  However incidental personal property is non-like-kind property that generally results in gain recognition.

Personal property is considered incidental to real property acquired in an exchange if (i) in standard commercial transactions, the personal property is typically transferred together with the real property, and (ii) the aggregate fair market value of the incidental personal property does not exceed 15 percent of the aggregate fair market value of the replacement real property.


The final regulations provide some guidance with respect to like-kind exchange transactions that are affected by the TCJA.  For additional information about how this guidance may impact your partnership, please contact a Cherry Bekaert team member.