Journal of Accountancy
By Brenda Graat, CPA
Prior to the enactment of the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, the rules in Sec. 1031, which allow taxpayers to defer recognition of gain on a like-kind exchange (the exchange of property used in a trade or business or for investment for property of a like kind to be used in a trade or business or investment), applied to both personal property and real property. Common like-kind exchanges of personal property prior to the TCJA included those of aircraft, boats, automobiles, trucks, and machinery or equipment. The TCJA amended Sec. 1031 to apply only to exchanges of real property. Because of this change, the exchange of personal property for other personal property of like kind is now a taxable event.
On the other hand, maintaining the ability to defer the gain on a sale of real property via a like-kind exchange remains key to taxpayers who sell real estate. The gain deferral allows real estate sellers to invest in new real estate, as opposed to paying taxes, which, in turn, increases their purchasing power. The question now is how to handle personal property, such as furniture and fixtures, associated with the sale of real property that qualifies as a like-kind exchange. (For the basic mechanics and other requirements of like-kind exchanges, see Sec. 1031 and associated Treasury regulations.)
ALLOCATION OF SALES PROCEEDS
It is recommended for the sale of real estate to allocate the sales proceeds among the categories of land, building, land improvement, and personal property, based on a qualified appraisal. A qualified appraiser can determine the value of the real estate and how to allocate to each bucket based on comparable sales, the income approach, or the replacement-cost approach. If a qualified appraisal is not obtained, a couple of other alternatives can be used to allocate the sales proceeds, such as using the values reported on the real estate tax bill or the residual net book value of the property. For a sale of a business, usually, the buyer and seller will allocate and agree upon the purchase price and the allocation of the sales proceeds to a group of assets by filing Form 8594, Asset Acquisition Statement Under Section 1060. But, for the sale of real estate, the buyer and seller do not have to agree on a sales price allocation at the time of the sale. The buyer and seller may have different plans for the property, which could alter the sales price allocation among the categories of land, building, land improvement, and personal property.
Most often, sales proceeds are not allocated to personal property with the sale of real estate, since personal property is not the driver of the sale. Rather, the intent of the buyer is to purchase the real property, such as the building and land. Having a minimal to zero amount of sales proceeds allocated to personal property will alleviate the issue of no longer being able to defer the gain on personal property via a like-kind exchange. Read more.