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Limits on the Section 1031 Exchange

Many taxpayers are familiar with the tax-deferral tool known as the like-kind or Section 1031 exchange. This approach permits a taxpayer to defer taxes upon sale of covered property when the taxpayer has a gain and also defers any loss. The deferral is accomplished when the taxpayer purchases like property within a specified time frame, using the proceeds of the sale.  This rule has been an important part of tax and business planning for many taxpayers and has extended widely over the years to a variety of tangible personal property as well as real property.
The 2017 tax overhaul has had a major impact on the like-kind exchange industry. The law now limits the use of the like-kind exchange under Section 1031 to only real estate, although all types and varieties of real estate are included. If you acquired tangible personal property with the intention of using the exchange technique in connection with the future sale of the property, you will need to be careful about planning and making sales of such property now that the Section 1031 exchange rule and its benefits will no longer apply. Consult with your tax practitioner instead of assuming the rule will allow you to defer tax on gains from sales of other than real property.
A further concern, where real estate exchanges are contemplated under the new law, exists where the real property is owned by a business (sole proprietor, partnership, S corporation) which has significant income. The new tax law, under Section 199A, allows a substantial (20%) income tax deduction for these types of businesses where the income falls below specified limits and specified situations. However, if a business has substantial income, the availability of this deduction may be limited under the Section 199A rules.  Again, it is important to consult with your tax advisor to understand the implications of the new rules.

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