Generally speaking, the taxpayer’s exchange of one property for another is regarded as a taxable matter; the income realized by the taxpayer, that is, the fair market value of the property received by the taxpayer[i] exceeds the tax paid by the taxpayer. The amount of property adjustment basis (unrecovered investment) is regarded as income. [ii]
For example, the income realized by taxpayers when they “convert” their property into cash[iii] is included in the taxpayer’s total income to determine their income tax liabilities.
Similarly, the taxpayer’s income from the material exchange of property and other property is significantly different from the property that the taxpayer has given up. [iv]
The general principle reflected in the aforementioned rules is that the taxpayer’s “re-adjustment” of the property that it essentially continuously owns should be excluded from the general income recognition rules. This principle is the basis for many non-recognition clauses in the Code, such as involving corporate reorganization, [v] certain capital contributions to corporate entities, [vi] certain modifications to debt instruments [vii], of course, such as-cordial communicate with. [viii]
According to Article 1031 of the Code, if property used in commerce, commerce or investment for productive purposes is exchanged for “same type” property that will be used for productive purposes in trade, no profit or loss will be recognized. Business or investment. The taxpayer is required to obtain the unrecognized income inherent in the deprived property on the adjusted basis equal to that of the deprived property, so that it can be retained in the hands of the taxpayer. [ix]
However, if the taxpayer’s property exchange meets the requirements of Article 1031, and the taxpayer receives not only the same property that is allowed to be exchanged in deferred tax, but also other unqualified property[x] or money (“stolen goods”) , The income realized by the taxpayer must be recognized and included in its total income, and its amount shall not exceed the fair market value of the stolen goods. [xi]
With the promulgation of the Tax Cuts and Employment Act, the scope of similar transaction rules is limited (starting from transactions completed after December 31, 2017) to transactions of real estate that are not primarily sold. [xiii] In other words, the TCJA removes personal property and certain intangible property from those eligible for similar exchange treatment. [xiv]
According to the report of the conference committee, [xv] the “real estate” that the conference intends to be eligible for similar exchange treatment before TCJA will continue to be eligible for similar exchange treatment under TCJA. In view of the Internal Revenue Service (IRS) and the courts that have historically allowed this treatment of multiple types of real estate, this legislative statement of intent bodes well for taxpayers.
For example, improved real estate and unimproved real estate are generally considered to be similar properties-improved or unimproved real estate is not important because the fact is only related to the grade or quality of the real estate. [xvi] Non-productive real estate held by taxpayers for future appreciation is considered to be held for investment rather than primarily for sale. Taxpayers can exchange urban real estate for pastures or farms, and can also exchange real estate held for trading or business for real estate held for investment by the taxpayer, and vice versa.
It seems simple, right? After all, by definition, what we usually think of as real estate is easy to identify. Of course, I mean land and buildings.
However, this simple method for identifying real estate would be wrong or even unfounded. In fact, many recognized authorities before TCJA go far beyond this restrictive interpretation. For example, the U.S. Internal Revenue Service has considered leasehold interests in expenses of 30 years or more as real property, stipulating that taxpayers can exchange such leasehold interests for expenses in real property as part of similar transactions. [xvii]
Unfortunately, for the purposes of similar trading rules, there is no generally accepted statutory or regulatory definition of real property. In addition, there are many properties or property rights that cannot intuitively be regarded as real property, but in some cases they have been regarded as property by the IRS or the courts. [xviii]
According to the preamble of the proposed regulation, the purpose is to give taxpayers certain certainty as to whether the property is “immovable property” for use in revised similar transaction rules; the preamble goes on to say that taxpayers need to determine the replacement received in exchange Whether any part of the property is non-identical property, and receipt of the property will require confirmation of income.
It seems that “determinism” comes at a price: a set of nested doll rules, one of which is defined embedded or built on top of the other.
The predicate definition in the series of definitions in the proposed regulation is “unique asset”. [xx] A project cannot be an improvement to land-that is, it cannot be an “inherent permanent structure” or a “structural component” with an inherent permanent structure-therefore, unless it is a unique asset, it cannot be Treated as real property. [xxi]
According to the proposed regulations, any other assets related to the asset are analyzed separately to determine whether the asset is a real estate, such as land, an inherent permanent structure or a structured asset with an inherent permanent structure.
Buildings and other inherent permanent structures are different assets. The assets and systems listed below as part of the structure are also considered different assets.
Determine whether an individually identifiable specific property item is a unique asset based on all facts and circumstances, including: (A) Whether the item is conventionally sold or purchased as a single unit, rather than being sold or acquired as a component of a larger asset Asset (B) can separate the project from the larger asset, and if possible, the cost of separating the project from the larger asset; (C) the project is usually regarded as having useful functions, depending on the larger asset in which it participates; (D) Separating the project from a portion of the larger asset will impair the function of that larger asset.
The proposed regulations are easy to get started, stating that real estate includes land and land improvement, undivided natural products, and water and air spaces adjacent to the land. [xxii]
example. The taxpayer owns a wharf, which consists of a U-shaped boat U and a tail tie. The U-shaped boat slip is a space on the water, surrounded by a pier on three sides. The tail tether is the water space at the end of a slide or on a long and straight dock. The taxpayer leases the ship list to the ship owner and tie the ship strap. The ship s and the stern tether are the waters adjacent to the land and therefore are real estate.
In turn, the improvement of land includes the “inherent permanent structure” and the “structural components” of the inherent permanent structure. [xxiii]
Inherent permanent structure refers to any building or other structure that is “unique assets” that are permanently fixed to real estate and usually fixed indefinitely. [xxiv]
For this reason, the proposed law defines “building” as any structure or building in the space within the enclosure, usually covered by a roof, the purpose of which is, for example, to provide shelter or house, or to provide work, office, parking, display Or sales space. Therefore, “buildings” include the following unique assets that are permanently fixed: houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping centers, factories and office buildings, warehouses, barns, enclosed garages, enclosed -Style transport stations and docks, as well as shops. [xxv]
If permanently fixed, the following assets are also regarded as inherent permanent buildings: underground swimming pools; paved parking areas, parking facilities and other sidewalks of roads, bridges and tunnels; special foundations; fixed docks and piers; fences; certain inherent permanent Advertising display; essentially permanent outdoor lighting facilities; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunications cables; microwave transmission, cellular, broadcasting and electrical transmission towers; oil and gas pipelines; offshore Drilling platforms, derricks, oil and gas storage tanks; granaries and silos; and closed transportation and terminal stations. [xxvi]
If the property is not included in the list of inherent permanent structures, the proposed regulations stipulate that the following factors must be used to determine whether the property is inherently permanent: (1) the way the unique asset is fixed to the real property; (2) the unique Whether the asset is intended to be transferred or kept in place; (3) The removal of the unique asset will cause damage to the item itself or the real property to which it is attached; (4) Any situation that indicates that the expected period of affixation is not uncertain; (5) Transfer The time and expense required for this unique asset. [xxvii]
example. The taxpayer owns an office building with sculptures in the courtyard. The sculpture is very big and heavy. The building is intended to support the sculpture, which is permanently fixed to the building with supports embedded in the foundation of the building. The sculpture was built inside the building. Removal will be expensive and time consuming, and will destroy the sculpture. It is reasonable to expect that the sculpture will remain in the building indefinitely.
Sculpture is not regarded as one of the inherent permanent structures listed in the regulations; therefore, taxpayers must use the above factors to determine whether the sculpture is inherently permanent.
Sculpture: (A) is permanently fixed to the building; (B) is not intended to be removed, but intended to remain in place indefinitely; (C) if demolished, it will be damaged and the building to which it is fixed will be damaged; (D) Expect to stay in the building indefinitely; (E) Need a lot of time and money to move. These factors support the conclusion that sculpture is an inherent permanent structure and therefore real estate.
example. Taxpayers have bus shelters. Each shelter consists of four pillars, a roof and two or three side panels. The taxpayer signed a long-term lease agreement with the local transportation authority to use the bus shelter. Each shelter is made of steel and bolted to the sidewalk. It takes less than a day to dismantle and move the bus shelter and will not seriously damage the bus shelter or its fixed real estate. The bus shelter is not a permanently fixed closed transport station or terminal, it is not a building, nor is it an inherent permanent structure. Therefore, the above factors must be used to analyze the bus shelters to determine whether they are inherently permanent structures. Bus shelter: (A) It is not permanently fixed on land or inherently permanent structure; (B) It is designed to be removable and cannot be left in place indefinitely; (C) It will not be damaged or will not be removed after removal Damage to the sidewalk to which it is attached; (D) will not be pasted indefinitely; (E) do not need to spend a lot of time and money to move. These factors support the conclusion that bus shelters are not inherently permanent structures and therefore not real estate.
The term “structural component” refers to any unique asset that is an integral part of and integrated with an inherent permanent structure. If interconnected assets work together to serve an inherent permanent structure (for example, a system that provides electricity, heat or water to a building), the assets will be analyzed together as a unique asset (which may be a structural component) . Only when the taxpayer holds its interest in the structural component and the real estate interests in the space in the inherent permanent structure served by the structural component, the structural component is eligible as a real estate. [xxviii]
The structural components include the following items, provided that the project is an integral part of the inherent permanent structure and integrated into it: partition doors; wiring; plumbing systems; central air conditioning and heating systems; ducted elevators and escalators; floors; permanent ceilings Sexual covering of walls, floors and ceilings; insulation; chimney fire extinguishing systems, including sprinkler systems and fire alarms; escape routes; safety systems; humidity control systems; and other similar properties. [xxix]
example. The taxpayer owns an office building and leases it to tenants. The building includes a zone owned by the taxpayer to delimit the space within the building. The office building has an internal non-load-bearing traditional drywall partition system. The system was installed during the construction of the office building. The conventional system consists of fully integrated gypsum board partitions, studs, seaming tape and covering seam compound. It reaches from the floor to the ceiling. In addition, the system is a unique asset within the meaning of the regulations.
Depending on the needs of new tenants, when the tenant moves out of the house, the conventional system may remain in place. The system has been integrated into the office building, and its design and construction can be retained in areas that do not need to be reconfigured or expanded. Conventional systems can only be removed by disassembly. Once removed, the system or its components can no longer be used. Dismantling the system will cause substantial damage to the system itself, but will not cause substantial damage to the building.
The conventional partition system consists of walls integrated into the inherent permanent structure and listed as structural components in the regulations. Therefore, the traditional partition system is real estate.
If a component of a building or inherently permanent building is a unique asset and is not listed as a structural component in the proposed regulations, it will be determined whether the component is a structural component based on the following factors: (1 ) Method, time and cost of installing and disassembling components; (2) Whether the components are designed to be movable; (3) The removal of components may cause damage to the component itself or the inherently permanent structure to which it is fixed; (4) In inherently permanent Whether components were installed during the construction of the structure.
After addressing the more conventional meaning of “immovable property,” the proposed regulations then consider examples in which intangible assets can be appropriately treated as immovable property for the purposes of similar transaction rules.
If an intangible asset derives value from real property or real property rights, it can be regarded as real property or real property rights. It is inseparable from the real property or real property rights, and it does not generate or contribute in addition to considering the use or occupation of space. In income.
For example, permits, permits, or other similar rights that are only used for land, the use of inherent permanent buildings, enjoyment or occupation and have the nature of lease or easement, are usually the rights and interests of real property. [xxx]
example. Taxpayers have obtained special permission from the government to place cellular towers on federal land adjacent to federal highways. Government regulations stipulate that the license is not a lease of land, but a license to use the land for cell phone towers. According to the license, the government reserves the right to cancel the license and can compensate taxpayers if the site needs to be used for higher public purposes. The nature of the permit is lease, allowing taxpayers to place cell phone towers in specific locations on government land. Therefore, the license is an interest in real property.
However, the proposed regulations also stipulate that the real estate operator of the operating license or permit is not real estate or real estate interests, if the permit or permit generates or contributes income, rather than consideration. Use and occupation of space. [xxxi]
I know, “Personal property?” You said. “What about TCJA? Now, are similar exchanges not limited to real estate?” Indeed.
However, the proposed regulations take a practical approach, recognizing that sometimes the purchase of alternative real estate acquired by taxpayers as part of similar exchanges may necessarily include the purchase of certain personal property.
According to the proposed regulations, if such private property is acquired by accidental purchase of alternative real estate in a deferred similar exchange, [XXXii] will not be considered for the purpose of determining whether the taxpayer is receiving funds in a constructive manner. It purchases and sells confiscated property, thereby making the entire exchange taxable. In the absence of such rules, it may be argued that the use of the proceeds from the sale to obtain substandard property violates the existing regulatory safe harbor, and taxpayers in deferred exchanges can avoid constructive ways through the tax haven The purpose of the similar exchange rules for receiving payments. [xxxiii]
According to the proposed rules, if personal property is usually transferred together with real property in a standard commercial transaction, the personal property will be “attached” to the real property acquired in the exchange and will not exceed 15% of the total fair market value of the replacement real estate.
For example, this might include the purchase of office furniture, where office buildings are purchased as replacement property as part of a similar long-term exchange. [xxxiv]
These proposed regulations will apply to exchanges that begin on or after the date they are issued as final regulations. Prior to the issuance of the final regulations, taxpayers can rely on these proposed regulations (provided that they are “consistently” in compliance) to conduct real estate transactions after December 31, 2017 until the final regulations are issued.
Taxpayers and their advisers should welcome the guidance provided by the proposed regulations and the opportunity to rely on them immediately.
Most of the materials introduced in the proposed regulation will not be considered groundbreaking; however, the regulation confirms the factual intensity of the analysis that must be carried out to determine whether a particular property constitutes real property in order to determine the rules for the exchange of similar properties.
To facilitate this process, the proposed rules eliminate uncertainties that may have revolved around the treatment of any inherently permanent structures and structural components specifically identified therein; just as importantly, they also provide a set of useful The general principles and factors used to determine the handling of any items not described.
Of course, the IRS has requested comments on various parts of the proposed rules. Taxpayers should always coordinate with the release of this information and review the final rules regarding any changes.
[ii] In other words, the remaining amount after the taxpayer’s remaining investment is returned to the taxpayer constitutes the realized income. If the amount realized by the taxpayer is not enough to restore the taxpayer’s property adjustment benchmark, the taxpayer has suffered a loss.
[x] Therefore, proper treatment of this “extra” substitute property, whether of the same kind or different, can make a huge difference in the amount of income recognized by the exchange taxpayer.
[xi] IRC seconds 1031(b). The taxpayer’s basis for the replacement of property will increase the amount of income recognized and reduce the amount received. IRC seconds 1031(d).
[xiii] However, if the property sold by the taxpayer on the exchange was disposed of on or before December 31, 2017, or the property collected by the taxpayer on the exchange was collected on or before the exchange, the transaction The date of the exception.
 Many other property categories have been excluded; such as stocks, bonds or notes; other securities or debt evidence; partnership interests; trusts or beneficial certificates; and chose to act.
[xviii] For example, if such joint shares at the time of exchange, shares in a reservoir or irrigation company (described in Section 501(c)(12)(A)) have been recognized by the Supreme Court or decree in the state where the company is located Or on behalf of real property or real property rights. The proposed regulations clarify that, in addition to the above clauses, for IRC Sec, when determining the meaning of the term “immovable property”, the local legal definition is usually not prevailing. Article 1031. The second is 1.1031(a)-3(a)(1). Of course, the goal is to provide unity on the status line.
[xix] I prefer to say “Matryoshka” dolls, although these definitions have no maternal or familial nature.
Yes, the context usually tells you the meaning, but I will look up anyway. “Lying on or on other things.” Fight for air rights; but water rights? I think it’s close enough.
The proposed regulations do not explain the meaning of a “fixed” structure, but it does explain that fixing to real estate can be achieved by weight alone, which means that something may be too heavy to move. For example, “The floor is fixed on his desk.”
This example is also helpful: the taxpayer owns a natural gas pipeline transmission system that provides pipelines to transport natural gas from unrelated third-party producers and collection facilities to unrelated third-party distributors and end users. The pipeline transmission system includes underground pipelines, isolation valves and vents, pressure control and relief valves, meters and compressors. Each of these unique assets was installed during the construction of the pipeline transmission system, and each asset was designed to remain in place forever. The pipeline is permanently fixed and listed as other inherent permanent structures in the regulations. Therefore, the pipeline is real estate.
[xxxiv] For this reason, we assume that the purchase of furniture is an industry practice in such transactions.
Disclaimer: Due to the general nature of this update, the information provided here may not be applicable to all situations, and no action should be taken on this information without specific legal advice based on specific circumstances.
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Post time: Aug-18-2020