| TAX REFORM BILL IMPACTS 1031"Tax Cuts and Jobs Act" repeals personal property LKEs; Real estate exchanges saved, still vulnerable|
Dear Friends, The long-awaited Republican tax reform proposal, released yesterday, modifies Section 1031 by repealing exchanges for all tangible and intangible personal property, leaving like-kind exchanges for real estate intact. As the proposal is still fluid, Section 1031 could be further affected as the bill moves through the markup process and is debated in the Senate. Even though the current proposal is not 100% of what we had, the FEA is grateful for the efforts of the many members of Congress and congressional staff who worked hard to preserve the core aspects of Section 1031.
Released yesterday, the "Tax Cuts and Jobs Act," should move quickly through the legislative process. A Chairman's Mark, an addendum by the committee chair, is scheduled for Friday, November 3. Full markup and committee consideration is expected to begin next week, on Monday, November 6, 2017. The schedule is aggressive and subject to change.
Section 3303 of the bill repeals like-kind exchanges for all personal property, such as machinery, equipment, vehicles, artwork, collectibles, and other intangible business assets. Real estate exchanges are preserved in the initial proposal, but may face more scrutiny or modification as the bill moves through the House markup and continues through the Senate.
In the legislative Section-by-Section Summary, Republican drafters of the bill argue that the proposed use of full expensing on tangible personal property would be equivalent to the benefits of Section 1031:
"The bill provides full expensing for most tangible personal property which provides a
marginal effective tax rate of zero percent to fully expensed property, equating to the
deferral that like-kind exchanges provide currently."
The expensing provision is temporary, sunsetting after five years. The Federation of Exchange Accommodators (FEA), the national trade association for 1031 practitioners like 1031 CORP., and its allies have argued that a temporary expensing regime does not provide an equal benefit, and results in a tax cliff at the end of the five-year period.
The use of Section 1031 like-kind exchanges to defer taxes indefinitely, and the possibility to eventually escape taxation, is also mentioned in the explanation. Republicans Set Aggressive Tentative Schedule, Aim for Thanksgiving
The proposed schedule to move the bill through the legislative process, updated this week, is as follows:
- Week of November 6: Markup in the House Ways & Means Committee.
- Week of November 13: House Floor consideration of the tax reform bill. / Markup (tentative) in the Senate Finance Committee.
- November 17 - December 24: Passage of tax reform bill targeted for as early as the Thanksgiving recess (November 17) or as late as Christmas Eve.
- The goal of the White House and Republican leadership is to have a tax reform bill signed into law within the next 3 to 8 weeks.
If the bill is passed into law:
- December 31, 2017: Deadline to complete sale/acquisition of either relinquished or replacement property, in order to qualify for treatment of Section 1031.
- January 1, 2018: Modifications to Section 1031 become effective.
The legislative schedule is aggressive. Many lobbyists, business groups, and constituents will be weighing in with members of Congress over the next few weeks. We are reviewing the bill and will be providing more information on potential impacts to Section 1031 like-kind exchanges as more information becomes available.
Please Tell Congress to Preserve Section 1031 in its Current State
Click here to tell Congress to preserve Section 1031. We only have a few days to get our letters in before the House finishes their mark-up and takes a vote