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 Massachusetts, as in the rest of the United States, Section 1031 of the Internal Revenue Code allows taxpayers to defer capital gains taxes on the exchange of like-kind properties, which must be held for business or investment purposes. Since the Tax Cuts and Jobs Act of 2017, this tax deferral only applies to real property, not to personal or intangible property. To qualify, the properties exchanged must be of the same nature or character. Real property within the United States is considered like-kind to other real property within the country, but not to property outside the U.S. If other property or money is received in addition to the like-kind property, the gain must be recognized to the extent of the additional property or money received. Losses, however, cannot be recognized. The exchange of certain assets, such as machinery or intellectual property, no longer qualifies for this treatment post-2017, except for specific exceptions like mutual ditch, reservoir, or irrigation stock. Taxpayers in Massachusetts must use Form 8824 to report a like-kind exchange to the IRS, following the instructions provided with the form to ensure compliance with federal tax law.