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U.S. proposes guidance on limits for tax-free exchanges

U.S. proposes guidance on limits for tax-free exchanges

New regulations provide guidance for defining “real property” in certain tax-free exchanges.

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The IRS has released proposed regulations to implement rules that limit taxpayers' ability to enjoy tax deferrals on exchanges of assets of like-kind. These rules were enacted in December 2017 and limit the exchanges qualifying for a tax deferral to only exchanges of "real property". The proposed regulations, which were released on June 12, 2020, provide guidance for these rules by clarifying what is considered "real property".

These proposed regulations will be effective beginning on or after the day they are published as final. However, taxpayers may rely on these regulations for exchanges of real property if consistently applied beginning after December 31, 2017, and before the final regulations are published.

Background

Previously, taxpayers were able to defer taxation on certain gains on exchanges of a broad variety of assets. The acquired asset would inherit the cost basis of the asset it was exchanged for, and taxation of the gain on that asset would be deferred until the asset was ultimately disposed of. These rules are commonly referred to as the like-kind exchange rules.

The U.S. Tax Cuts and Jobs Act (TCJA), enacted in December 2017 as part of U.S. tax reform, includes a provision limiting the application of the like-kind exchange rules to exchanges of real property only.

What is included in "real property"?

Under the proposed definition, the following types of "real property" would continue to qualify for a tax deferral on exchanges of like-kind assets for purposes of the new rules:

  • Inherently permanent structures
    • Includes any building permanently affixed to the property
    • The regulations include a specific list of qualifying structures, and a list of characteristics to consider for unlisted structures
  • Structural components of inherently permanent structures
    • For example, this includes a gas line that fuels a building's heating system, but not a gas line that fuels business equipment in the building
    • Each component must be evaluated
    • A specific list of components is provided, as well as characteristics to consider for unlisted components
  • Certain intangible assets representing an interest in real property
  • Incidental personal property
    • Qualifying personal property is transferred together with the real property and the aggregate value of the personal property transferred does not exceed 15% of the aggregate value of the replacement real property.
    • Notably, the proposed definition excludes machinery and equipment and real property held for sale in the ordinary course of business.

For more information, contact your KPMG advisor.

Information is current to June 16, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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