Are you familiar with the concept of like-kind exchanges? You might have heard of them under their alias, 1031 exchanges. This involves multiple transactions to dispose of one asset and acquire another without generating tax liability from the first sale. The tax advantages of these were limited under the Tax Cuts and Jobs Act, putting real property front and center in a new way. In June of this year, however, the IRS & Treasury released new info about how they define real property. If you’re still interested in using 1031 exchanges as a tax strategy, this could be relevant for you.

Proposed regulations from these bodies define real property as improvements to land, natural products of land including unsevered crops, air space and water adjacent to land, and land itself. Under these new regulations, each qualifying asset must be analyzed individually to determine whether or not it meets the ground to qualify as real property. This can include structural components.

The regulations also include many other structures such as roads, bridges, tunnels, in-ground swimming pools, pavements and parking facilities, and fences. For a full list of these, you might want to do additional research.

Even if a property is not specifically named in the proposed regulations, there is a five part test to consider when determining if something is an inherently permanent structure. This includes:

  • Whether the distinct asset is designed to be removed or to stay in place
  • The manner in which the new property is attached to real property
  • The expense and time required to move the asset in question
  • Any circumstances that suggested the expected period of affixation is not indefinite
  • The damage that removal of that asset would cause to the item itself

In some cases, it is also possible that machinery could be classified as real property.

If you have other questions about the process of doing a 1031 exchange, a tax advisor and financial advisor can be a great help to you as you plan ahead.

Need more support for your personal or business tax concerns? Contact an Atlanta tax attorney today to discover more.