Recently, the House of Representatives and Senate have proposed bills that would make changes to the current tax laws. These bills, called the Tax Cuts and Jobs Act, proposed a change that will affect Personal Property Exchanges.
Currently, an investor is able to perform a 1031 Exchange on real property as well as personal property. Personal property in this instance is described as an asset held for investment purposes or used for business purposes.
Examples of personal property that would be used in an exchange include:
- Equipment used for business purposes such as busses, airplanes, tractors, or trucks
- Livestock used for business purposes such as cows on a dairy farm
- Furnishing used for business purposes such as a hotel or office building
- Businesses such as restaurants, gas stations, or dental offices
- Collectibles such as art, cars, or coins
Under the current tax laws, an investor could perform an exchange by trading one restaurant for another or by exchanging business vehicles that have been depreciated in full for newer ones and defer the capital gain taxes on these sales.
However, according to the proposed changes to the tax code under the Tax Cuts and Jobs Act, HR1, Title 3, Business Tax Reform Section, Subtitle D, Section 3303, personal property will no longer be eligible for a 1031 Exchange. Instead, only real property will be eligible.
Although the proposal will remove personal property from being eligible for exchanges, the bill does provide full expensing for most tangible personal property. This will provides a marginal effective tax rate of zero percent to fully expensed property, equating to the deferral that an exchange currently provides.
What Does This Mean for My Investments?
If either bill becomes law, then starting January 1, 2018, investors will be able to perform a 1031 Exchange on real property, but not personal property. Prior to this, if you have sold your personal property this tax year (2017), you as an investor will be able to complete the exchange in 2018.
If the sale escrow hasn’t closed before the New Year, your exchange will be subject to this new change, assuming it passes. The best path, if you find yourself in this position, is to consult with your CPA or tax professional to find out what option would provide you with the largest benefit.
Since this proposed change will result in new rules and regulations regarding personal property exchanges, we can’t know the exact implications until we are able to see it in action. We always suggest consulting with a professional before you make any decisions regarding your investment personal property exchanges, sales, or purchases.