Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. Internal Revenue Code (IRC) Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. You can’t recognize a loss.

Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date.

Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. But certain exchanges of mutual ditch, reservoir, or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges.

Like-Kind Property

Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.
Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. But real property in the United States is not like-kind to real property outside the United States.

Reporting a Like-Kind Exchange

Form 8824, Like-Kind Exchanges, is used to report a like-kind exchange. Form 8824 Instructions provide information on general rules and how to complete the form.

In Georgia, as in all states, the federal tax regulations under Internal Revenue Code (IRC) Section 1031 allow for the deferral of capital gains taxes when a taxpayer sells business or investment property and reinvests the proceeds in a similar, or 'like-kind,' property. This means that if you sell a property and purchase another one that is similar in nature or character, you may not have to pay taxes on the gain immediately. However, this tax deferral does not apply if you receive cash or other non-like-kind property as part of the exchange; in such cases, you must recognize and pay taxes on the gain to the extent of the other property or cash received. It's important to note that the Tax Cuts and Jobs Act of 2017 restricted this benefit to real property exchanges only, excluding personal and intangible property from eligibility after December 31, 2017, with certain exceptions for transactions initiated before that date. To report a like-kind exchange to the IRS, Form 8824 must be used. While state tax laws in Georgia may have additional considerations, they generally follow federal guidelines for like-kind exchanges.