On November 23, 2020, the IRS and Treasury issued final regulations (T.D. 9935) that amend and finalize proposed regulations issued in June, 2020. We discussed the proposed regulations here.

The final regulations address changes made in 2017 under the Tax Cuts and Jobs Act to Section 1031, which limited like-kind exchange treatment to exchanges of real property. The final regulations generally follow the proposed regulations, with some notable changes, discussed below.

Defining “Real Property”

The proposed regulations provided that state and local law definitions of real property were not controlling under Section 1031. The final regulations, however, provide that if property is considered real property under state or local law on the date of the exchange, the property will generally also be classified as real property under Section 1031.

Eliminating “Purpose and Use” Test

The proposed regulations provided that otherwise qualifying property would not qualify as real property under Section 1031 if the property contributed to the production of income unrelated to the use or occupancy of space. The final regulations dispose of this “purpose and use” test.

Inherently Permanent Structures

Like the proposed regulations, the final regulations define an inherently permanent structure as a building or other structure that is permanently affixed to real property. The final regulations clarify that a structure is considered to be permanently affixed if it is expected to remain affixed for an indefinite period of time based on all the facts and circumstances.