IRS issues Final Regs Define “Real Property” for Like-Kind Exchanges


T.D. 9935; IR-2020-262

As of January 1, 2018, the 2017 Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property, and exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges.

Section 1031 does not provide a definition for the term “real property.”

Under the final regulations, real property means means land and improvements to land, unsevered natural products of land, and water and air space superjacent to land.

Inherently permanent structure” means any building or other structure that is a distinct asset and is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time. Affixation is considered permanent if it is reasonably expected to last indefinitely based on all the facts and circumstances.

A distinct asset is analyzed separately from any other assets to which it relates to determine if it is real property. Whether a particular separately identifiable item of property is a distinct asset is based on all the facts and circumstances:

  • Whether the item is customarily sold or acquired as a single unit rather than as a component part of a larger asset;
  • Whether the item can be separated from a larger asset, and if so, the cost of separating the item from the larger asset;
  • Whether the item is commonly viewed as serving a useful function independent of a larger asset of which it is a part; and
  • Whether separating the item from a larger asset of which it is a part Start Printed impairs the functionality of the larger asset.

Generally, if property is real property if the property is real property under the law of the State or local jurisdiction in which that property is located.

Factors from examples where state or local law of the applicable jurisdiction in which the property at issue is located does not address whether the property is real property include:

  • If it is permanently affixed to the building by supports embedded in the building’s foundation;
  • If it is designed to be removed or is designed to remain in place indefinitely;
  • If it would require significant time and expense to move, or can be installed and removed quickly and with little expense;
  • If it is designed to be moved and is not designed specifically for the particular building it is a part of;
  • If it would be damaged if removed and would damage the building to which it is affixed;
  • If it is expected to remain in the building indefinitely; and
  • If it was installed during construction of the building.

Intangible assets that are real property include: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; stock in a cooperative housing corporation; shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) of the Code if, at the time of the exchange, such shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property; and land development rights. Similar interests are real property if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property.

Personal property is non-like-kind property that generally results in gain recognition. Personal property is disregarded in evaluating the like-kind identification rules if it is incidental to a larger item of property and therefore, is not treated as property separate from the larger item. Property is incidental to a larger property if, in standard commercial transactions, the property is typically transferred with the larger item of property, and the aggregate fair market value of all of the incidental property does not exceed 15 percent of the aggregate fair market value of the larger item of property.