Under the new tax reform law, like-kind exchange tax treatment is now generally limited to exchanges of real property, according to the IRS. The Tax Cuts and Jobs Act, passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead.
Effective Jan. 1, 2018, exchanges of personal or intangible property such as machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible.
Like-kind exchange treatment now applies only to exchanges of real property that is held for use in a trade or business or for investment. Real property, also called real estate, includes land and generally anything built on or attached to it. 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 allows like-kind treatment for some exchanges of personal or intangible property. If the taxpayer disposed of the personal or intangible property on or before Dec. 31, 2017, or received replacement property on or before that date, the exchange may qualify for like-kind exchange treatment.
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Improved real property is generally of like-kind to unimproved real property. For example, an apartment building would generally be of like-kind to unimproved land. However, real property in the United States is not of like-kind to real property outside the U.S.
To report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with their tax return for the year the taxpayer transfers property as part of a like-kind exchange. This form helps a taxpayer figure the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received, if cash or property that isn’t of like kind is involved in the exchange. Form 8824 helps compute the amount of gain the taxpayer must report.