IRS releases final regulations on like-kind exchanges


Authored by RSM US LLP

IRS and Treasury have released final regulations for like-kind exchanges under section 1031 (TD 9935). The final regulations make some substantial changes from the proposed versions – most notably by deferring to state and local law to determine when property is considered real property for purposes of section 1031. The new regulations implement Congress’s overhaul of like-kind exchange when it passed TCJA, which restricted section 1031 to exchanges of interests in real property. Note the new regulations create a definition for real property that is specific to section 1031 and not intended to influence any other sections.

The most significant aspect of the new regulations is the definition of what constitutes real property. Under the new rules, property is considered real property for purposes of section 1031 if (a) it is classified as real property under state and local law, subject to certain exceptions; (b) it is property listed as real property in the regulations; or (c) it is considered real property based on all the facts and circumstances test using the factors given in the regulations. 

The proposed regulations de-emphasized state and local law classifications, focusing instead on a new statutory framework with enumerated examples of real property and processes for property that does not fit neatly into any particular category. However, many comments on the proposed regulations argued that the new framework didn’t fully carry out Congressional intent that property qualifying as real property before TCJA should continue to qualify after TCJA. State and local law classifications were the most important factor in determining whether property represents real property under section 1031, so looking to state and local law helps maintain continuity.

The final regulations also declined to include the ‘purpose or use’ test introduced by the proposed regulations. Under the proposed regulations, the use or function of property was a key component in analyzing whether property represented real property. Certain tangible or intangible property could not be classified as real property if it contributed to the production of income unrelated to the use or occupancy of space. Under the final regulations, tangible property that is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time, as well as structural components integrated into real property, will generally qualify as real property. The final regulations further define the terms ‘permanently affixed,’ to add clarity.

The final regulations clarify that certain permits and licenses to use inherently permanent structures qualify as real property. However, the IRS declined to add additional rules to help classify easements or leaseholds. The final regulations further include the allowance that up to 15% of the value of property transferred in an exchange may be personal property without presenting a problem to the identification or triggering the receipt of exchange funds problem of Reg. section 1.1031(k)-1(g)(6). See our tax alert on the proposed regulations for more detail on these provisions.


The final regulations present a broader definition of real property than was offered by the proposed regulations. The final regulations include some additional clarity, but mostly expand the types of property that can qualify. Taxpayers must still assess the question on an asset-by-asset basis, and are encouraged to plan like-kind exchanges with their tax advisor to make sure they qualify.