Tax Reform Changes Like-Kind Exchanges

The Tax Cuts and Jobs Act, passed in December 2017, made tax law changes that could affect your tax return for 2018 – and returns for the years ahead. Read on for more insight into like-kind exchanges.

What is a Like-Kind Exchange?

In a like-kind exchange, a taxpayer exchanges one “like-kind” asset for another. By doing so, the taxpayer may defer some or all of the capital gain tax that would be triggered if the taxpayer sold the asset outright.

Who Uses Like-Kind Properties?

Businesses, rental property owners, farmers, listen up! This tax reform law may affect you.

What are Like-Kind Properties?

Like-kind properties are two assets considered to be of the same type or nature. The property must be used in a trade or business or for the production of income, such as a rental property.

Most real property qualifies for exchange treatment and this has not changed under the TCJA. Real property includes land and generally anything built on or attached to it, such as office buildings, apartments, and hotels. Real properties may be “like-kind” even if they differ in grade or quality.

For example, unimproved land may be exchanged for a improved land with buildings on it. Only real property located in the U.S. is eligible for like-kind treatment.

Like-kind treatment is not allowed for exchanges of securities such as stocks and bonds, personal use property, and property held for sale (such as inventory). Like-kind treatment is also not allowed when the owner sells the business property, then reinvests the proceeds into another business property. The exchange must be contemporaneous (e.g. building for building) or facilitated through a qualified intermediary.

Prior to the Tax Cuts and Jobs Act, like-kind treatment was also permitted for exchanges of machinery, equipment, vehicles, and other tangible personal property and for some intangible assets.

What’s Changed?

Under the TCJA, like-kind exchanges are now generally limited to exchanges of real property. Tangible personal property and intangible property no longer qualify for like-kind exchange treatment.

Transition Rule

As explained in the previous section, effective Jan. 1, 2018, exchanges of personal or intangible property no longer qualify for like-kind exchange treatment. Thus taxpayers who have traded used vehicles for new ones in the past must now record a sale rather than a like-kind exchange.

A transition rule in the new law allows like-kind treatment for some exchanges of tangible personal or intangible property. If the taxpayer disposed of the tangible personal or intangible property on or before Dec. 31, 2017, or received replacement property on or before that date, the exchange may qualify for like-kind exchange treatment.

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