On February 26, 2014, House Ways & Means Committee Chairman Dave Camp released a Discussion Draft of his Comprehensive Tax Reform Proposal.  The Discussion Draft proposes repeal of IRC Section 1031 in its entirety. The language from the Discussion Draft regarding section 1031 appears below.

Sec. 3133. Repeal of like-kind exchanges

Current law: Under current law, an exchange of property, like a sale, generally is a taxable transaction. A special rule provides that no gain or loss is recognized to the extent that property held for productive use in the taxpayer's trade or business, or property held for investment purposes, is exchanged for property of a like-kind that also is held for productive use in a trade or business or for investment. The taxpayer receives a basis in the new property equal to the taxpayer's adjusted basis in the exchanged property. The like-kind exchange rule applies to a wide range of property from real estate to tangible personal property. It does not apply, however, to exchanges of stock in trade or other property held primarily for sale, stocks, bonds, partnership interests, certificates of trust or beneficial interest, other securities or evidences of indebtedness or interest, or to certain exchanges involving livestock or involving foreign property. A like-kind exchange does not require that the properties be exchanged simultaneously - as long as the property to be received in the exchange is identified within 45 days and ultimately received within 180 days of the sale of the originally property, gain is deferred.

Provision: Under the provision, the special rule allowing deferral of gain on like-kind exchanges would be repealed. The provision would be effective for transfers after 2014. However, a like-kind exchange would be permitted if a written binding contract is entered into on or before December 31, 2014, and the exchange under the contract is completed before January 1, 2017.

Considerations:

The like-kind exchange rules currently allow taxpayers to defer tax on the built-in gains in property by exchanging it for similar property. With multiple exchanges, gains essentially may be deferred for decades, and ultimately escape taxation entirely if the property's basis is stepped up to its fair market value upon the death of the owner.

The current rules have no precise definition of "like-kind," which often leads to controversy with the IRS and provides significant opportunities for abuse.

JCT estimate: According to the Joint Committee on Taxation (JCT), the provision would increase revenues by $40.9 billion over 2014-2023.

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The FEA has been preparing for this over the past few years, educating legislators about the powerful economic value of �1031.  We have also spent the past year educating and building strong coalitions among the real estate, farming, equipment leasing, manufacturing and other industry groups that represent our clients. 

1031 CORP. will continue to keep you informed through future newsletters and special announcements. The time will definitely come when we will ask you to contact your federal legislators to tell them how you have benefited from section 1031.    

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A 1031 exchange is allowed under section 1031 of the Internal Revenue Code and allows the deferral of FEDERAL gain. Many states also have similar laws that allow a 1031 exchange to defer the state gain or income tax. 

Pennsylvania law does not contain a provision similar to IRC �1031, therefore property exchanges resulting in gain or income are generally subject to Pennsylvania tax. However, the Department has determined that gain or loss on like-kind exchanges does not have to be recognized at the time of the exchange if the taxpayer's method of accounting allows deferral of gain. A taxpayer must use the method of accounting that allows the deferral of gain on a consistent basis, and the method must clearly reflect the taxpayer's income. In addition, a taxpayer may not change his or her method of accounting just to obtain a tax benefit for a particular transaction, and the deferral of gain or income with respect to like-kind exchanges will remain the exception rather than the rule.  [Pennsylvania Personal Income Tax Bulletin No. 2006-07, 10/20/2006.]

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Helping you simplify the reporting of your 1031 exchange!

December 17, 2013