Tax Strategies & Credits

Tax Reform Limits Tax Benefits for Some Like-Kind Exchanges

by
Sonu Shukla
on
3/21/2018
Tax Reform Limits Tax Benefits for Some Like-Kind Exchanges

Are you familiar with like-kind exchanges?

Also called Sec. 1031 exchanges for the tax code section that allows them, they represent an exception mechanism that allowed those who have gains on the sale of investment or business properties to put off paying tax on those gains by reinvesting the profit they’ve realized into the purchase of a similar property instead of paying tax at the time of the sale. Taxpayers have traditionally been able to take advantage of this exception for sales and purchases of items including cars, farm animals, real estate, and other business and investment items. Unfortunately, the recently passed tax reform laws have changed all that.

As of 2018, the Tax Cuts and Jobs Act has changed the exception previously allowed under Sec. 1031, limiting them to nothing but exchanges of real property as long as it is not primarily being held for the purpose of a sale. Not only will taxpayers be prevented from getting a benefit from the exchange of real and intangible property, but there are additional restrictions, with one specifically prohibiting the exception applying to property in the United States and property outside the country being considered of like kind.

Exception Based on Timing

Though the changes represented by the Tax Cuts and Jobs Act apply to exchanges that are completed after December 31, 2017, there is a provision called the Transition Rule that creates a carve-out for property sold on or received in exchange on or before the last day of 2017. This means that where previously a company trading in an older piece of equipment or vehicle for a replacement could defer a resulting gain into the future, they no longer can. Every sale or purchase will lead to a taxable transaction, no matter whether it results in a loss for the business or a gain. The same is true for transactions involving the trade or investment in virtual currency: each transaction will need to be reported as a capital loss or gain instead of being able to take advantage of the old tax deferral rules under Sec. 1031.

Sonu Shukla, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

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