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 Utah, as in all states, the federal tax regulations under Internal Revenue Code (IRC) Section 1031 apply to business or investment property exchanges. This section allows taxpayers to defer paying tax on gains from the sale of property if they reinvest the proceeds into similar, or 'like-kind,' property. However, this deferral is not applicable if the taxpayer receives other property or money that is not like-kind; in such cases, the gain must be recognized to the extent of the non-like-kind property or money received. Since the Tax Cuts and Jobs Act took effect on January 1, 2018, only real property exchanges qualify for this tax deferral. Personal or intangible property, such as machinery, equipment, vehicles, artwork, and intellectual property, no longer qualify, with the exception of certain mutual ditch, reservoir, or irrigation stock. Real property must be within the United States to be considered like-kind. Taxpayers in Utah must use Form 8824 to report a like-kind exchange to the IRS, following the instructions provided with the form to ensure compliance with the reporting requirements.