#Irc 1031 code#
#Irc 1031 series#

#Irc 1031 series#

Treasury uses a cascading series of definitions to implement the federal tax rule for improvements to land. In the typical style of a tax regulation, the U.S.

If a taxpayer cannot qualify a potential improvement to land as real property using the local law rule, the taxpayer will need to use the federal tax rule under the regulations to qualify the property as real property.

Property B may still be considered real property under the federal tax rule described below, but the investor could not rely on the local law rule to qualify the exchange under section 1031. In that case, because Property B is not considered real property in Washington (i.e., the jurisdiction in which it is located), the investor could not rely on the local law classification of Property B to treat that property as real property for purposes of section 1031. However, assume further that Property B is not considered real property under Washington law. For example, letвЂ™s assume an investor wants to exchange Property A, which is located in Oregon, for Property B, which is located in Washington, and that both Property A and Property B would be treated as real property under Oregon law. It is important to note, however, that differences in local law can potentially result in inconsistent treatment of similar property under the local law rule. Accordingly, provided that each property subject to an exchange qualifies as real property in the jurisdiction in which the property is located, each property will be considered real property for purposes of section 1031. The relevant state or local law is the law of the jurisdiction in which the property is located. With respect to the local law rule, the regulations provide that (outside a narrow band of intangible-type assets discussed below), property classified as real property under state or local law on the date it is transferred in an exchange is real property for purposes of section 1031. Improvements:ДЄ significant portion of the new regulations is devoted to teasing out the definition of an вЂњimprovement to land.вЂќ In this regard, the regulations can be thought of as having two components вЂ“ (i) a general deference to the state or local law classification of property as real property (the вЂњ local law ruleвЂќ) and (ii) a framework for analyzing whether property that is not classified as real property under the local law rule is nevertheless treated as real property for purposes of section 1031 (the вЂњ federal tax ruleвЂќ). These categories of assets tend to create the most uncertainty, as many of the other categories of real property listed in the regulations are self-evident. We will focus here on two aspects of the regulations вЂ“ (i) the meaning of an вЂњimprovement to landвЂќ and (ii) the ability to treat certain intangible assets as real property for purposes of section 1031. Generally, the regulations define real property in a common-sense way as land and improvements to land, unsevered natural products of land, water and air space over land, and certain intangible interests in real property.

The regulations are effective for exchanges beginning after December 2, 2020. Treasury helped address some of this uncertainty by issuing regulations that provide taxpayers with guidance regarding the definition of real property for purposes of section 1031. Although there are significant similarities in these definitions, enough variation exists to create some doubt regarding how real estate investors should interpret the term вЂњreal propertyвЂќ in the context of section 1031.ДЄt the end of 2020, the U.S.

#Irc 1031 code#

Instead, the tax code and regulations will vary the definition of real property from rule-to-rule. income tax has no single definition of real property. Only property that qualifies as real property for that purpose continues to enjoy the benefit of section 1031. Most real estate investors are familiar with section 1031 exchanges, and by now, most of these investors have also likely been informed that the Tax Cuts and Jobs Act, passed at the end of 2017, limited the application of that section to exchanges of вЂњreal property.вЂќ Although this change continues to allow real estate investors to benefit from tax deferral through section 1031, it puts more pressure on identifying exactly what type of property qualifies as real property for purposes of that section.