Tax Reform Limits Like-Kind Exchanges to Defer Taxes

Like-Kind Exchanges Will Affect Your Business

Like-Kind Exchanges is another article in a a series explaining how the various tax changes made by the GOP’s Tax Cuts & Jobs Act (the “Act”) affect your business, as well as you personally and your family. WorthTax wants to offer additional strategies you might employ to reduce your tax liability under the new tax laws.

Deferring Tax with Like-Kind Exchanges

Whenever you sell business or investment property and have a gain, you generally have to pay tax on the gain at the time of sale. In the past, the IRS made provision for the exception in the tax code. You could postpone paying tax on the gain if you took the proceeds and made an investment into a similar property as part of a qualifying like-kind exchange. These types of exchanges are commonly called Sec. 1031 exchanges (referring to the tax code section that allows them). These rules use to apply to real estate, cars, farm animals and other business and investment items that are like-kind property.

Changes Made by Tax Reform

However, under the Act, and beginning in 2018, Sec. 1031 exchanges will only allow exchanges of real property that is not held primarily for sale. It is important to note that real property within the U.S. and real property located outside of the United States are not like-kind property for the purposes of these rules. Thus, exchanges of personal property and intangible property will no longer qualify for tax-deferred treatment.

Impact on Trade-ins

Transition Rule

The provision for Like-Kind exchanges generally applies to exchanges that were complete after December 31, 2017. However, the IRS provides an exception for any exchange if the taxpayer disposes of the property in the exchange on or before December 31, 2017. Another exception is should the taxpayer receive the property in the exchange on or last year’s December 31, 2017 date.

Example #1 of Like-Kind Exchange

An example of this law change’s impact is when a business trades property such as a vehicle or machinery for a replacement. In the past, it was a tax strategy to sell the old property if the results of a disposition was a deductible tax loss. This is also true when the trade in toward the new property had the disposition resulting in a gain. Thereby the business could defer the gain into the future. The new Tax Reform Law, The Act, has taken away that option, and now even trade-ins will result in a taxable transaction, whether it is a gain or loss.

Example #2: Virtual Currentency Trades

Another example is investors in virtual currency who trade one type of virtual currency for another. The IRS requires that they report their trades as capital gains or losses and won’t be able to use the 1031 tax-deferral rules.

Do You Have Questions About the 1031 Tax-Deferral Rules?

You can read more about the 1031 Tax-Deferral Rules. Or, better yet, should you have questions about how this change will impact your business or investment transactions, please give the office a call. Alex can be reached at 781.849.7200 or email us at contactus@worthtax.com. And, you can also book an appointment online here.

We would love to hear your comments below about your experience with the new Tax Law. Do you think you will make money or lose it in the future and why?

Alex Franch, BS EA

Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.

Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.

Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.

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