Td 9935

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations
Dated: October 21, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020–23688 Filed 12–1–20; 8:45 am]
BILLING CODE 6705–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9935]
RIN 1545–BP02

Statutory Limitations on Like-Kind
Exchanges
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations providing guidance under
section 1031 of the Internal Revenue
Code (Code) to implement recent
statutory changes to that section. More
specifically, the final regulations amend
the current like-kind exchange
regulations to add a definition of real
property to implement statutory changes
limiting section 1031 treatment to likekind exchanges of real property. The
final regulations also provide a rule
addressing a taxpayer’s receipt of
personal property that is incidental to
real property the taxpayer receives in an
otherwise qualifying like-kind exchange
of real property. The final regulations
affect taxpayers that exchange business
or investment property for other
business or investment property, and
that must determine whether the
exchanged properties are real property
under section 1031.
DATES:
Effective date: These final regulations
are effective on December 2, 2020.
Applicability dates: These regulations
generally apply to exchanges beginning
after December 2, 2020. See
§§ 1.1031(a)–1(e)(2), 1.1031(a)–3(c), and
1.1031(k)–1(g)(9). However, the
regulations in §§ 1.168(i)–1(e)(2)(viii)(A)
and 1.168(i)–8(c)(4)(i) apply to taxable
years beginning after December 2, 2020.
See §§ 1.168(i)–1(m)(5) and 1.168(i)–
8(j)(5).
FOR FURTHER INFORMATION CONTACT:
Edward C. Schwartz at (202) 317–4740,
or Suzanne R. Sinno at (202) 317–4718
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:

Background
I. Overview
This document amends the Income
Tax Regulations (26 CFR part 1, as

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revised April 1, 2020) under section
1031 (current regulations). The
amendments to the current regulations
(final regulations) implement statutory
amendments to section 1031 made by
section 13303 of Public Law 115–97,
131 Stat. 2054 (2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA). Section 13303(c) of the TCJA
amended section 1031 to limit its
application to exchanges of real
property for exchanges completed after
December 31, 2017, subject to a
transition rule for certain exchanges in
which property had been transferred
before January 1, 2018. To implement
these statutory changes, the final
regulations limit the application of the
like-kind exchange rules under section
1031 to exchanges of real property, add
a definition of real property, and adapt
an existing incidental property
exception to apply to a taxpayer’s
receipt of personal property that is
incidental to real property the taxpayer
receives in the exchange.
II. Section 1031 After the TCJA
As amended by the TCJA, section
1031(a) provides that no gain or loss is
recognized on the exchange of real
property held for productive use in a
trade or business or for investment
(relinquished real property) if the
relinquished real property is exchanged
solely for real property of a like kind
that is to be held either for productive
use in a trade or business or for
investment (replacement real property).
The legislative history to the TCJA
amendments to section 1031 provides
that Congress ‘‘intended that real
property eligible for like-kind exchange
treatment under present law will
continue to be eligible for like-kind
exchange treatment under the
[amended] provision.’’ H.R. Conf. Rept.
115–466, at 396, fn. 726 (2017)
(Conference Report). However, left
unchanged by the TCJA, section 1031(b)
provides that a taxpayer must recognize
gain to the extent of money and nonlike-kind property the taxpayer receives
in an exchange.
III. Current Regulations Regarding
‘‘Like Kind’’
The need to determine whether the
relinquished real property and the
replacement real property are of a like
kind continues to exist after the changes
to section 1031 made by the TCJA.
Current § 1.1031(a)–1(b) provides that
‘‘like kind’’ refers to the nature or
character of the real property and not to
its grade or quality. The fact that any
real property involved is improved or
unimproved is not material in
determining whether real property is of

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like kind. Under current § 1.1031(a)–
1(c), examples of exchanges of real
property of a like kind include an
exchange of a leasehold interest in a fee
with 30 years or more to run for real
estate.
IV. Identification of Exchanged
Properties
Under section 1031(a)(3), unchanged
by the TCJA, real property a taxpayer
receives in an exchange is not of likekind to the relinquished property
unless, within 45 days after the
taxpayer’s transfer of the relinquished
real property, the real property is
identified as replacement real property
to be received in the exchange. Current
§ 1.1031(k)–1(c)(4) provides a limit on
the number of properties, or the fair
market value of the properties, a
taxpayer may identify to meet the
requirements of section 1031(a)(3).
However, under current § 1.1031(k)–
1(c)(5), property is disregarded in
evaluating the identification rules if it is
incidental to a larger item of property
and therefore, is not treated as property
separate from the larger item. Property
is incidental to a larger property if, in
standard commercial transactions, the
property is typically transferred with
the larger item of property, and the
aggregate fair market value of all of the
incidental property does not exceed 15
percent of the aggregate fair market
value of the larger item of property.
V. Recognition of Gain or Loss on
Actual or Constructive Receipt of NonLike-Kind Property
Under current § 1.1031(k)–1(f)(1) and
(2), if a taxpayer actually or
constructively receives money or nonlike-kind property for the relinquished
property before the taxpayer receives
like-kind replacement real property, the
transaction is a sale or taxable exchange
and not a like-kind exchange, even
though the taxpayer may ultimately
receive like-kind replacement real
property. Current § 1.1031(k)–1(g)(2)
through (5) provides safe harbors, the
use of which results in a taxpayer not
being considered in actual or
constructive receipt of the consideration
for the relinquished property.
Under current § 1.1031(k)–1(g)(4)(i),
in the case of a taxpayer’s transfer of
relinquished property involving a
qualified intermediary, the
determination of whether the taxpayer
is in actual or constructive receipt of
money or non-like-kind property is
made as if the qualified intermediary is
not the agent of the taxpayer. However,
current § 1.1031(k)–1(g)(4)(i) applies
only if the agreement between the
taxpayer and the qualified intermediary

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expressly limits the taxpayer’s rights to
receive, pledge, borrow, or otherwise
obtain the benefits of money or nonlike-kind property held by the qualified
intermediary. Current § 1.1031(k)–
1(g)(7) lists items received in an
exchange that are disregarded in
determining whether a taxpayer’s rights
to receive, pledge, borrow, or otherwise
obtain the benefits of money or nonlike-kind property are expressly limited.
VI. Proposed Regulations
On June 12, 2020, the Department of
the Treasury (Treasury Department) and
the IRS published a notice of proposed
rulemaking (REG–117589–18) in the
Federal Register (85 FR 35835)
containing proposed regulations under
section 1031 (proposed regulations).
The Treasury Department and the IRS
received 21 written comments in
response to the notice of proposed
rulemaking. All comments were
considered and are available at http://
www.regulations.gov or upon request. A
public hearing on the proposed
regulations was neither requested nor
held. After full consideration of the
comments received, this Treasury
decision adopts the proposed
regulations with modifications in
response to such comments, as
described in the Summary of Comments
and Explanation of Revisions following
this Background.
Summary of Comments and
Explanation of Revisions
I. Overview
The final regulations retain the basic
approach and structure of the proposed
regulations, with certain revisions. In
particular, the final regulations revise
the definition of ‘‘real property’’ in the
proposed regulations to provide that
property is classified as real property for
section 1031 purposes if, on the date it
is transferred in an exchange, the
property is real property under the law
of the State or local jurisdiction in
which that property is located. The final
regulations also revise the proposed
definition of real property to eliminate,
with regard to both tangible and
intangible properties, any consideration
of whether the particular property
contributes to the production of income
unrelated to the use or occupancy of
space (referred to as the ‘‘purpose or use
test,’’ as defined in part II.B.1 of this
Summary of Comments and Explanation
of Revisions). Finally, in § 1.1031(a)–
3(a)(7), the final regulations retain the
language of the proposed regulations
clarifying that the rules of these final
regulations apply only for purposes of
section 1031, and that no inference is

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intended with respect to the
classification or characterization of
property for other purposes of the Code.
II. Definition of Real Property
A. State or Local Law Definitions of Real
Property
1. Approach of the Proposed
Regulations
Section 1031 does not provide a
definition for the term ‘‘real property.’’
As noted in part II of the Background
section, the Conference Report provides
that Congress intended real property
that was eligible for like-kind exchange
treatment prior to the enactment of the
TCJA to continue to be eligible for likekind exchange treatment after its
enactment. See Conference Report, at
396, fn. 726. Specifically, with regard to
the applicability of State law for real
property determinations, the Conference
Report sets forth the following example:
‘‘a like-kind exchange of real property
includes an exchange of shares in a
mutual ditch, reservoir, or irrigation
company described in section
501(c)(12)(A) [of the Code] if at the time
of the exchange such shares have been
recognized by the highest court or
statute of the State in which the
company is organized as constituting or
representing real property or an interest
in real property’’ (Conference Report
Example). Id. Accordingly, due to the
absence of a statutory definition for the
term ‘‘real property’’ in section 1031,
the Treasury Department and the IRS
based the proposed definition of real
property upon the Conference Report
Example.
Under proposed § 1.1031(a)–3(a)(1),
State law controls whether shares in a
mutual ditch, reservoir, or irrigation
company are real property for purposes
of section 1031. Aside from those
enumerated asset types, the proposed
regulations provide that State or local
law definitions were not controlling for
purposes of determining whether
property is real property for section
1031 purposes. See proposed
§ 1.1031(a)–3(a)(1). The intent of the
Treasury Department and the IRS in
proposing a rule that expressly applied
State or local law in this manner was to
provide a definition of real property for
purposes of section 1031 ‘‘in a manner
consistent with the scope described by
Congress in the Conference Report.’’ See
the preamble to the proposed
regulations at 85 FR 35836.
2. Consideration of Comments and
Revision of ‘‘Real Property’’ Definition
Commenters generally critiqued the
apparent scope of the application of
State and local law in the proposed

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regulations for purposes of defining real
property. These commenters contended
that, prior to enactment of the TCJA,
State and local law classification of a
property often was the determining
factor in characterizing property as real
or personal under section 1031. With
regard to the Conference Report
Example, the commenters asserted that
the reference to ‘‘shares in a mutual
ditch, reservoir, or irrigation company’’
merely constituted a set of examples
that Congress provided to broadly
indicate that real property eligible for
like-kind treatment under law prior to
enactment of the TCJA will continue to
be eligible following the TCJA’s
amendment to section 1031.
Consequently, the commenters
recommended that the final regulations
conform to that intent by expanding the
rules to rely significantly, or wholly, on
State-law classifications for all assets,
rather than limiting such reliance to
shares in a mutual ditch, reservoir, or
irrigation company. Additionally,
commenters suggested that the final
regulations should include multiple
examples of instances in which
taxpayers may rely on State or local law
for purposes of classifying property as
real or personal.
In light of these comments, the
Treasury Department and the IRS have
reconsidered the degree to which State
or local law determinations of real
property should be controlling for
defining real property for section 1031
purposes. As a result of that
reconsideration, the final regulations
provide generally that property is real
property for purposes of section 1031 if,
on the date it is transferred in an
exchange, that property is classified as
real property under the law of the State
or local jurisdiction in which that
property is located (State and local law
test). The State and local law test
applies to both tangible and intangible
property classifications.
However, consistent with
Congressional intent that ‘‘real property
eligible for like-kind exchange
treatment’’ under the law in effect prior
to enactment of the TCJA will continue
to be eligible for like-kind exchange
treatment after enactment of the TCJA,
property ineligible for like-kind
exchange treatment prior to enactment
of the TCJA remains ineligible,
including real property that was
excluded from the application of section
1031. See Conference Report at 396, fn.
726. Prior to amendment by the TCJA,
former section 1031(a)(2) explicitly
excluded certain assets from the
application of section 1031.
Accordingly, the final regulations
exclude from the definition of real

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property the intangible assets listed in
section 1031(a)(2) prior to its
amendment by the TCJA, regardless of
the classification of the property under
State or local law, because such
property never was ‘‘real property
eligible for like-kind exchange
treatment’’ prior to enactment of the
TCJA. Conference Report at 396, fn. 726
(emphasis added).
In summary, under the final
regulations, property is classified as real
property for purposes of section 1031 if
the property is (i) so classified under the
State and local law test, subject to
certain exceptions, (ii) specifically listed
as real property in the final regulations,
or (iii) considered real property based
on all the facts and circumstances under
the various factors provided in the final
regulations. A determination that
property is personal property under
State or local law does not preclude the
conclusion that property is real property
as specifically listed in § 1.1031(a)–
3(a)(2)(ii) or (a)(2)(iii)(B) or under the
factors listed in § 1.1031(a)–3(a)(2)(ii)(C)
or (a)(2)(iii)(B).
3. Chief Counsel Advice (CCA)
201238027
Multiple commenters who objected to
the scope of State and local law
determinations under the proposed
regulations also asserted that the
approach in the proposed regulations
replicated the analysis in CCA
201238027 (April 17, 2012), particularly
with regard to one of the fact patterns
addressed therein regarding a steam
turbine (Case 3). In Case 3, the Chief
Counsel Advice disregarded State law
that characterized the steam turbine as
real property and held that the steam
turbine was not of like kind to land
because it did not have the same nature
or character as land. Commenters
objected to this conclusion, contending
that the State law classification of the
steam turbine as real property should be
respected and, based on that
classification, the steam turbine and the
undeveloped land should be considered
like-kind property.
These final regulations do not address
whether exchanged properties are of
like kind to one another. As a
consequence of expressly including the
State and local law test in the final
regulations, the final regulations do not
adopt the reasoning of CCA 201238027
to the extent it suggests that State or
local law is disregarded in determining
whether property is real property under
section 1031.

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4. Additional Comments Regarding the
Application of State and Local Law
In connection with the State and local
law test under the final regulations, the
Treasury Department and the IRS have
considered numerous additional
comments. For instance, one commenter
recommended that any asset determined
to be essentially the same as an asset
classified as a real property for purposes
of section 1031 also should
automatically be treated as real property
for purposes of section 1031. For
example, if one asset (Property A) is
classified as real property under the
State or local law of State X, an asset
located in a different jurisdiction
(Property B) that is essentially the same
as Property A also should be classified
as real property for section 1031
purposes, irrespective of whether
Property B is classified as real property
under (i) the law of the State or local
jurisdiction in which Property B is
located or (ii) the real property
definition and factors under the
proposed regulations.
The final regulations do not adopt this
suggestion. First, the Treasury
Department and the IRS have
determined that the ‘‘essentially the
same’’ standard recommended by the
commenter would be difficult for
taxpayers to apply and the IRS to
administer with certainty. In addition,
the analysis advocated by the
commenter is conceptually similar to
the analysis applied by CCA 201238027,
which, based on several other
comments, the Treasury Department
and the IRS have determined to be
inconsistent with the State and local
law test provided in the final
regulations.
A commenter also requested that the
final regulations classify as real property
all property that was treated as real
property for section 1031 purposes at
any time between May 22, 2008, and the
effective date of the TCJA. May 22,
2008, is the effective date of former
section 1031(i), which treats shares in
certain mutual ditch companies as real
property for section 1031 purposes. The
commenter reasoned that, because the
treatment of mutual ditch company
shares has been preserved by the
proposed regulations following the
enactment of the TCJA, all property
classified as real property as of May 22,
2008, also should be classified as real
property under the final regulations.
The final regulations do not adopt the
commenter’s suggestion. The Treasury
Department and the IRS have
determined that a rule that fixes
property classifications under State or
local laws as of a date certain would add

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complexity as the post-enactment
period of the TCJA continues to
lengthen. Given that the final
regulations have broadened the
applicability of State and local real
property classification for purposes of
section 1031 qualification, the Treasury
Department and the IRS have
determined that the perpetually
increasing complexity of such a rule
would significantly outweigh any
potential benefits of the commenter’s
suggestion.
B. Purpose or Use Test
1. Approach of the Proposed
Regulations
Under proposed § 1.1031(a)–3(a)(1),
real property includes land and
improvements to land, and
improvements to land include both
inherently permanent structures and the
structural components of inherently
permanent structures. Inherently
permanent structures are buildings or
other structures that are permanently
affixed to real property and that will
ordinarily remain affixed for an
indefinite period of time. See proposed
§ 1.1031(a)–3(a)(2)(ii)(A). A list of
structures that qualify as buildings or as
other inherently permanent structures is
provided in proposed § 1.1031(a)–
3(a)(2)(ii)(B) and (C). A structural
component is any distinct asset, as
defined in the proposed regulations,
that is a constituent part of, and
integrated into, an inherently permanent
structure. See proposed § 1.1031(a)–
3(a)(2)(iii)(A). Proposed § 1.1031(a)–
3(a)(2)(iii)(B) provides examples of
items that are structural components
under section 1031.
The proposed regulations also
consider the function of property in
determining whether the property is real
property for section 1031 purposes
(purpose or use test). In particular,
neither tangible property, such as
machinery or equipment, nor intangible
property, such as licenses or permits, is
classified as real property under the
proposed regulations if the property
contributes to the production of income
unrelated to the use or occupancy of
space, irrespective of any other factor
under the proposed regulations. See
proposed §§ 1.1031(a)–3(a)(2)(ii)(D)
(regarding machinery and equipment)
and 1.1031(a)–3(a)(5) (regarding
intangible property). For example, a gas
line installed for the sole purpose of
providing fuel to fryers and ovens in a
restaurant is not a constituent part of an
inherently permanent structure and
therefore not real property under the
proposed regulations. See also proposed
§ 1.1031(a)–3(b)(12) (providing a similar

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example with regard to a license to
operate a casino business, which is an
intangible property). The proposed
regulations requested comments on
whether the purpose or use test is
appropriate to use as the basis for
determining whether property qualifies
as real property for section 1031
purposes.

1031 nor the regulations under section
1031 provide a definition of machinery.
However, the term ‘‘machinery’’ is not
necessary if, as this commenter
recommended, real property
determinations for an asset are based on
the degree to which the asset is
permanently affixed and not its purpose
or use.

2. Summary of Comments Received
Commenters uniformly disagreed
with the purpose or use test and
advocated that it be omitted from the
final regulations. According to these
commenters, the purpose or use test
improperly narrows the scope of the
definition of real property for section
1031 purposes and, if adopted in the
final regulations, would treat certain
types of property that have historically
been treated as real property for section
1031 purposes as personal property
contrary to the directive of Congress in
the Conference Report. See Conference
Report, at 396, fn. 726.
In addition, commenters contend that
machinery and equipment should not be
disqualified as an inherently permanent
structure, and thus as real property,
merely because the machinery or
equipment is used in the production of
income unrelated to use or occupancy of
space. Instead, the commenters asserted
that if such property is inherently
permanent, the property should be
treated as real property for purposes of
section 1031, regardless of its purpose
or use or the type of income it generates.
Therefore, according to the commenters,
permanently affixed items such as gas
lines, cooling units, and piping should
be treated as real property without
regard to whether those items comprise
part of an income-generating structure.
The commenters also recommended that
the final regulations provide revised
examples to reflect the position that the
real property characterization of a
particular asset is based on the degree
to which the item is permanently
affixed and not on its purpose and use.
One commenter also emphasized that
the purpose or use test would prove
burdensome for small businesses and
individual taxpayers because that test
would require them to expend resources
on cost segregation studies to determine
which items of machinery and
equipment are personal and which are
real property. According to the
commenter, such expenses would be
eliminated if real property
determinations are based on permanent
affixation and not purpose or use.
Finally, the commenter noted that
inclusion of the purpose or use test in
the final regulations would be
problematic because neither section

3. Elimination of Proposed Purpose or
Use Test
The Treasury Department and the IRS
agree with the commenters and have
revised the final regulations to eliminate
a purpose or use test for tangible
property. Consequently, with regard to
tangible property, if such property is
permanently affixed to real property and
will ordinarily remain affixed for an
indefinite period of time, the property is
generally an inherently permanent
structure and thus real property for
section 1031 purposes, irrespective of
the purpose or use of the property or
whether it contributes to the production
of income. A structural component
likewise is characterized as real
property under the final regulations if it
is integrated into an inherently
permanent structure, regardless of
whether the structural component
contributes to the production of income.
Accordingly, under the final
regulations, items of machinery and
equipment are characterized as real
property if they comprise an inherently
permanent structure, a structural
component, or are real property under
the State or local law test.
The Treasury Department and the IRS
received no comments regarding the
application of the proposed purpose or
use test to real property classifications
of intangible property. However, the
Treasury Department and the IRS have
determined that many of the comments
pertaining to the purpose or use test
with regard to tangible property equally
apply to classifications of intangible
property. As a result, under the final
regulations, whether intangible property
produces or contributes to the
production of income other than
consideration for the use or occupancy
of space is not considered in
determining whether intangible
property is real property for section
1031 purposes. However, the purpose of
the intangible property remains relevant
to the real property determination.

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C. Revisions to the Definition of
Inherently Permanent Structure
Proposed § 1.1031(a)–3(a)(2)(ii)(A)
defines the term ‘‘inherently permanent
structures’’ to mean ‘‘any building or
other structure that is a distinct asset
(within the meaning of [proposed

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§ 1.1031(a)–3(a)(4)]) and is permanently
affixed to real property and that will
ordinarily remain affixed for an
indefinite period of time.’’ One
commenter highlighted that the
proposed regulations do not define the
phrases ‘‘permanently affixed’’ or
‘‘indefinite period of time’’ for purposes
of defining ‘‘inherently permanent
structure,’’ other than providing that
affixation to real property may be
accomplished by weight alone. See
proposed § 1.1031(a)–3(a)(2)(ii)(C). The
commenter noted that § 1.856–
10(d)(2)(i) provides that, ‘‘[i]f the
affixation is reasonably expected to last
indefinitely based on all the facts and
circumstances, the affixation is
considered permanent.’’ As a result, the
commenter recommended that the final
regulations clarify the meaning of these
terms, including by adding the abovequoted language in § 1.856–10 to
explain the phrase ‘‘permanently
affixed.’’
The Treasury Department and the IRS
agree with the commenter’s suggestion
to incorporate the language provided in
§ 1.856–10(d)(2)(i) to provide additional
clarity regarding the meaning of
‘‘permanently affixed’’ and have revised
the final regulations accordingly.
D. Comments Regarding Offshore
Platforms and Pipelines, and Related
Example
Proposed § 1.1031(a)–3(a)(2)(ii)(C)
specifically lists offshore drilling
platforms and oil and gas pipelines as
inherently permanent structures, and
therefore such property is defined as
real property. The proposed regulations
also provide an example addressing a
pipeline transmission system comprised
of underground pipelines, isolation
valves and vents, pressure control and
relief valves, meters, and compressors.
See proposed § 1.1031(a)–3(b)(10)
(Example 10). Example 10 concludes
that the meters and compressors are not
real property because (i) they are not
time consuming and expensive to install
and remove from the pipelines, (ii) they
are not designed specifically for the
particular pipelines for which they are
a part, and (iii) their removal does not
cause damage to the asset or the
pipelines if removed. Based on the same
analysis, Example 10 concludes that
isolation valves and vents, and pressure
control and relief valves are real
property for section 1031 purposes.
One commenter suggested that the
final regulations should remove the
adjective ‘‘drilling’’ from ‘‘offshore
drilling platform’’ as listed as an
inherently permanent structure in
proposed § 1.1031(a)–3(a)(2)(ii)(C). For
support, the commenter stated that an

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offshore platform used for production is
structurally similar to an offshore
platform used for drilling, and therefore
the term should be appropriately
broadened. As so modified, the term
‘‘offshore platform’’ would cover both
offshore drilling platforms and offshore
production platforms.
The commenter also provided
additional recommendations regarding
assets used in an oil and gas business.
For example, the commenter suggested
that the final regulations should
explicitly provide that underground and
above-ground pipelines are real
property for section 1031 purposes. The
commenter recommended that the final
regulations characterize meters and
compressors as real property. In
contending that Example 10 provided
an incorrect conclusion, the commenter
explained that meters and compressors
generally require substantial amounts of
time and money to prepare, construct,
and place in service due to unique
circumstances affecting individual
pipelines.
The Treasury Department and the IRS
have clarified the final regulations based
on the commenter’s recommendations.
As an initial matter, the final regulations
delete ‘‘drilling’’ from the term
‘‘offshore drilling platform,’’ as listed in
proposed § 1.1031(a)–3(a)(2)(ii)(C). The
Treasury Department and the IRS agree
that an offshore platform used for
production likewise should be
characterized as an inherently
permanent structure because such
property is structurally similar to an
offshore platform used for drilling.
In addition, the final regulations
contain a revised version of Example 10,
renumbered as Example 9, to clarify the
analysis and conclusions in the
proposed example. With regard to an
above-ground pipeline, an oil and gas
pipeline is listed property in proposed
§ 1.1031(a)–3(a)(2)(ii)(C) and is therefore
real property, regardless of whether
above or below ground. Whether
particular meters or compressors are
real property must be determined by
their unique facts and circumstances. If
under different circumstances the
meters or compressors described in
proposed Example 10, now Example 9,
required substantial amounts of time
and money to prepare, construct, and
place in service due to unique
circumstances affecting individual
pipelines, the components would be
real property for section 1031 purposes.
Example 9 in the final regulations
illustrates these rules.

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E. Requests To List Additional Tangible
Assets as Real Property
1. Installed Appliances
One commenter requested that the
final regulations expressly list as real
property installed appliances (also
referred to as ‘‘appliances in place’’),
including refrigerators, stoves,
dishwashers, and microwave ovens. The
commenter explained that, in certain
regions of the United States, residential
real property generally is sold with the
appliances in place as part of the sale.
The commenter further stated that, in
many like-kind exchanges of one-family
rental properties, sellers (i) consider the
appliances, furniture, and electrical
fixtures remaining in the property to be
part of the real property transaction, and
(ii) count such items of property
towards the amount of replacement
property that must be acquired to avoid
gain recognition under section 1031.
2. Sheds and Carports
One commenter recommended adding
sheds and carports to the list of assets
that are expressly included as buildings
in proposed § 1.1031(a)–3(a)(2)(ii)(B).
The commenter contended that such
structures generally take the form of
buildings and, therefore, a specific
listing as a building under the final
regulations would increase certainty
regarding exchanges involving such
assets.
3. Wi-Fi Systems
Another commenter suggested that
proposed § 1.1031(a)–3(a)(2)(iii)(A) be
revised to specifically list as structural
components Wi-Fi systems, distributed
antenna systems, and other integrated
systems that may be installed in
buildings to transmit and receive
wireless signals and cellular service.
The commenter asserted that such
integrated systems are installed in
buildings and inherently permanent
structures, and often are as essential to
the use of buildings as heating and
electricity. Additionally, the commenter
emphasized that such integrated
systems generally require that the
taxpayer hold a real property interest in
conjunction with its installation of the
system, and therefore should satisfy the
definition of a structural component
under the proposed regulations.
4. Trade Fixtures
One commenter recommended that
‘‘trade fixtures’’ be expressly listed as
real property under the final
regulations. The commenter noted that
such items are semi-permanently affixed
to real property and perform or support
the performance of functions (including

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manufacturing, cooking, and decorative
lighting) unrelated to basic building
functions. Additionally, the commenter
asserted that trade fixtures have
historically been treated as real property
for State law purposes, except in
instances in which there is a plan to
remove or relocate them to a different
property.
5. Final Regulations Do Not Specifically
List the Requested Items as Real
Property
After consideration of the
commenters’ recommendations, the
Treasury Department and the IRS have
determined that the final regulations
should not specifically list any of these
suggested assets as real property for
purposes of section 1031. The final
regulations are intended to provide tests
under which taxpayers can evaluate the
particular facts and circumstances of the
property in question to determine with
certainty whether particular property is
characterized as real or personal
property. To limit complexity of the
final regulations, the characterization of
the above-listed items in this part II.E is
most appropriately determined based on
the application of the State and local
law test or the various factors in the
final regulations.
Specifically, with regard to installed
appliances, whether a seller considers
an item transferred with real property to
be part of the real property transaction
is not a relevant factor in determining
whether the item is real property for
section 1031 purposes. Movable items,
such as furniture, are personal property
irrespective of the terms of the sales
contract for the real property that is the
subject of the sale. Those items,
however, may be incidental personal
property that, under the final
regulations, is disregarded in
determining whether a taxpayer’s rights
to receive, pledge, borrow, or otherwise
obtain the benefits of money or nonlike-kind property held by a qualified
intermediary are expressly limited as
provided in § 1.1031(k)–1(g)(6).
F. Requested Clarifications Regarding
Carpeting and Wiring
One commenter requested
clarification regarding whether
carpeting in an office building, or other
real property held for productive use in
a trade or business or for investment, is
considered real property or personal
property under the final regulations.
Another commenter inquired whether
wires installed within the walls of an
office building are real property for
section 1031 purposes if the wires were
installed specifically for computer
workstations that produce income for

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the business. The commenter
acknowledged that the proposed
regulations provide that wiring is a
structural component, and therefore real
property for purposes of section 1031,
provided the wiring is a constituent part
of, and integrated into, an inherently
permanent structure.
The Treasury Department and the IRS
appreciate the commenters’ requests for
clarification regarding the qualification
of carpeting and wiring as inherently
permanent structures or structural
components. However, such
qualification would be dependent upon
a facts-and-circumstances analysis
unique to the specific carpeting or
wiring, as well as the classification of
such items under applicable State or
local law. As a result, the final
regulations do not adopt the
commenters’ suggestions, but instruct
taxpayers to apply the State and local
law test or the various factors in the
final regulations.
G. Requests To List Additional
Intangible Assets as Real Property
1. Stock in a Cooperative Housing
Corporation
The proposed regulations provide that
an interest in real property, including
fee ownership, co-ownership, a
leasehold, an option to acquire real
property, an easement, or a similar
interest, is real property for purposes of
section 1031. See proposed § 1.1031(a)–
3(a)(1). One commenter suggested that
this list of items be revised to include
stock held by a person as a tenantstockholder in a cooperative housing
corporation. The commenter noted that
the term ‘‘interests in real property’’ for
purposes of regulations regarding real
estate investment trusts (REITs)
includes stock held by a person as a
tenant-stockholder in a cooperative
housing corporation. See § 1.856–3(c).
2. Development Rights
One commenter requested that rights
to develop land be expressly listed as
real property in final § 1.1031(a)–3(a)(1).
For support, the commenter emphasized
that the IRS has published a private
letter ruling that an exchange of a fee
interest in real estate for development
rights in real estate qualified as a likekind exchange under section 1031.
Accordingly, the commenter concluded
that development rights should be
specifically listed as real property in the
final regulations.
3. Final Regulations Expressly List the
Requested Items as Real Property
The Treasury Department and the IRS
agree with the commenters’

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recommendations regarding stock in a
cooperative housing corporation and
land development rights. The intangible
assets described in this part II.G have
historically been characterized as real
property. Accordingly, the final
regulations have been revised to
expressly list those intangible assets.
4. Licenses and Permits
Under the proposed regulations, a
license, permit, or other similar right
that is solely for the use, enjoyment, or
occupation of land or an inherently
permanent structure, and that is in the
nature of a leasehold or easement,
generally is an interest in real property
under section 1031. See proposed
§ 1.1031(a)–3(a)(5)(ii). One commenter
contended that this language is too
restrictive because it addresses only
leaseholds and easements.
In response to this comment, the final
regulations provide that a license,
permit, or other similar right that is
solely for the use, enjoyment, or
occupation of land or an inherently
permanent structure and that is in the
nature of a leasehold, an easement, or a
similar right generally is an interest in
real property and thus is real property
under section 1031.
H. Requested Clarifications Regarding
Easements and Leaseholds
Proposed § 1.1031(a)–3(a)(5)(ii)
provides that a ‘‘license, permit, or other
similar right that is solely for the use,
enjoyment, or occupation of land or an
inherently permanent structure and that
is in the nature of a leasehold or
easement generally is an interest in real
property.’’ One commenter requested
that final § 1.1031(a)–3(a)(5)(ii) add the
word ‘‘perpetual’’ or ‘‘permanent’’
before ‘‘easement’’ to communicate that
an easement must have a term
exceeding 30 years as of the date of the
exchange to be consistent with
§ 1.1031(a)–1(c). Under that regulation,
examples of exchanges of real property
of a like kind include an exchange of a
leasehold interest in a fee with a term
of 30 years or more to run for real estate.
On this aspect of easements and
leaseholds, however, the comments
received were not uniform. For
example, another commenter requested
that final § 1.1031(a)–3(a)(5)(ii) specify
that leaseholds or easements of any
duration are an interest in real property
under section 1031. As a conforming
revision, the commenter also
recommended that the final regulations
remove the reference in § 1.1031(a)–1(c)
to leaseholds with 30 years or more to
run to provide parity among all interests
in real property eligible for like-kind
exchanges under section 1031. In

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addition, a separate commenter
recommended that the final regulations
clarify whether a leasehold interest in
real property must have, as of the date
of the exchange, a remaining term of at
least 30 years or more in order to qualify
as an interest in real property.
The Treasury Department and the IRS
note, as an initial matter, that the
proposed and final regulations address
solely the qualification of an asset as
real property for section 1031 purposes,
and do not specifically address whether
an exchange is like kind. Duration of an
easement or a leasehold is not relevant
in determining whether the easement or
leasehold is real property under
§ 1.1031(a)–3(a)(5), and therefore,
proposed § 1.1031(a)–3(a)(5)(ii) did not
include a reference to duration. The
commenters, however, correctly note
that duration may be relevant under
§ 1.1031(a)–1(c) for purposes of
determining whether an exchange of an
easement or leasehold for real property
would qualify as like kind. Because likekind determinations exceed the scope of
the final regulations, the commenters’
suggestions and requests for
clarification regarding like-kind
determinations are not incorporated into
these final regulations.
I. Applicability of Distinct Asset Test to
Three-Property Rule in § 1.1031(k)–
1(c)(4)(i)(A)
The proposed regulations provide
that, in general, each distinct asset is
analyzed separately from each other
distinct asset in determining whether a
distinct asset is real property for section
1031 purposes. One commenter
requested that the final regulations
clarify that this distinct asset rule does
not apply for purposes of § 1.1031(k)–
1(c)(4)(i)(A), which generally limits a
taxpayer to the identification of three
replacement properties (three-property
rule). In response to the comment, the
Treasury Department and the IRS have
added language to the definition of
distinct asset in § 1.1031(a)–3(a)(4) to
clarify that the distinct asset rule
applies only for purposes of
determining whether property is real
property for section 1031 purposes and
does not affect the application of the
three-property rule.
III. Incidental Property Rule
A. Approach of the Proposed
Regulations
Section 1.1031(k)–1(g)(7)(iii) of the
proposed regulations addresses the
receipt of personal property that is
incidental to the taxpayer’s replacement
real property in an exchange (incidental
property rule). The incidental property

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rule provides that, for exchanges
involving a qualified intermediary,
personal property that is incidental to
replacement real property (incidental
personal property) is disregarded in
determining whether a taxpayer’s rights
to receive, pledge, borrow, or otherwise
obtain the benefits of money or nonlike-kind property held by the qualified
intermediary are expressly limited as
provided in § 1.1031(k)–1(g)(6).
However, as personal property,
incidental personal property is non-likekind property that generally results in
gain recognition under section 1031(b)
on the exchange.
Personal property is incidental to real
property acquired in an exchange if (i)
in standard commercial transactions,
the personal property is typically
transferred together with the real
property, and (ii) the aggregate fair
market value of the incidental personal
property transferred with the real
property does not exceed 15 percent of
the aggregate fair market value of the
replacement real property (15-percent
limitation).
B. Calculation of 15-Percent Limitation
The Treasury Department and the IRS
received several comments
recommending a change to the
calculation of the amount of incidental
property that a taxpayer may acquire
and still meet the requirements of the
incidental property rule. For example,
commenters recommended that the
value of incidental property under the
final regulations be permitted to equal
up to 15 percent of the total fair market
value of the replacement real property,
as well as the incidental property. For
support, these commenters highlighted
that their suggested 15-percent
calculation is consistent with sections
856(d)(1)(C) and 856(c)(9)(A)(ii) of the
Code pertaining to REITs. In addition, a
commenter suggested that final
§ 1.1031(k)–1(g)(7)(iii) should permit the
aggregate fair market value of the
incidental personal property to equal up
to 20 percent of the aggregate fair market
value of the replacement real property.
The final regulations do not adopt
these comments. As explained in part II
of the Explanation of Provisions section
of the preamble to the proposed
regulations, the proposed incidental
property rule is ‘‘based on the existing
rule in § 1.1031(k)–1(c)(5), which
provides that certain incidental property
is ignored in determining whether a
taxpayer has properly identified
replacement property under section
1031(a)(3)(A) and § 1.1031(k)–1(c).’’ 85
FR 35839. In addition, the Treasury
Department has determined that a
limitation in excess of 15 percent

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‘‘might induce taxpayers to bundle more
personal property with their exchanged
property,’’ which ‘‘would lead to
increased amounts of personal property
exchanged with real property under
section 1031 and effectively unlock a
class of personal property that would no
longer be ‘incidental’ to the real
property.’’ 85 FR 35840. Consequently,
the Treasury Department and the IRS
continue to believe that the proposed
15-percent limitation, and its
calculation, are ‘‘responsive to ordinarycourse exchanges that often commingle
personal property and real property as
part of the aggregate exchanged
property.’’ Id.
C. Requests To Identify Incidental
Property Rule as a Safe Harbor
Commenters requested that the
incidental property rule be specifically
identified in the final regulations as a
safe harbor. One commenter expressed
concern that, unless identified as a safe
harbor, the incidental property rule may
be interpreted as a bright-line rule under
which acquisitions of personal property
valued in excess of 15 percent of the
real property will cause the exchange to
fail, and the transfer of relinquished
property to be fully taxable.
Additionally, a separate commenter
requested that the final regulations
clarify that incidental property may
include intangible property such as
goodwill.
The final regulations do not adopt the
request that the incidental property rule
be identified as a safe harbor. The items
in current § 1.1031(k)–1(g)(1) through
(5) consist of safe harbors that help
taxpayers comply with other rules in
§ 1.1031(k)–1, and § 1.1031(k)–1(g)(7)(i)
and (ii) are items that are disregarded in
determining whether one of the existing
safe harbors ceases to apply. The
incidental property rule adds an
additional item to § 1.1031(k)–1(g)(7)
that is disregarded in determining
whether one of the existing safe harbors
ceases to apply. Identifying the
incidental property rule as a safe harbor
would thus be confusing because it is an
item that is disregarded in determining
if an existing safe harbor applies.
Therefore, the incidental property rule
operates as part of an existing safe
harbor. Consequently, acquisitions of
personal property valued in excess of 15
percent of the replacement real property
are not disregarded in determining if
one of the safe harbors in § 1.1031(k)–
1(g)(3) through (5) ceases to apply and
whether the taxpayer’s rights to receive,
pledge, borrow, or otherwise obtain the
benefits of money or non-like-kind
property are expressly limited as
provided in § 1.1031(k)–1(g)(6), but will

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not automatically cause the exchange to
fail section 1031 and the transfer of
relinquished property to be treated as a
sale or taxable exchange.
Further, the incidental property rule
applies to non-real property, regardless
of whether tangible or intangible. No
change to the regulations is required to
accommodate this suggestion.
D. Application of Section 1031(b) to
Receipt of Incidental Personal Property
Several commenters recommended
that the final incidental property rule
provide that a taxpayer’s receipt of
personal property incidental to the real
property received in a like-kind
exchange be treated as the receipt of real
property, and thus not give rise to
recognized gain under section 1031(b).
Under section 1031(b), a taxpayer must
recognize gain on a section 1031
exchange to the extent of money or nonlike-kind property the taxpayer receives
in the exchange. Similarly, one
commenter suggested that, if the final
regulations require recognition of gain
on the receipt of incidental personal
property, the final regulations should
not include the incidental property rule.
That commenter contended that
inclusion of the incidental property rule
in the final regulations will result in
some taxpayers misinterpreting the rule
by treating incidental personal property
in the same manner as real property for
purposes of the nonrecognition of gain
or loss under section 1031.
The final regulations do not adopt the
commenters’ recommendations. As
amended by the TCJA, section 1031(a) is
limited to exchanges of real property.
However, the TCJA did not amend
section 1031(b), which provides that a
taxpayer must recognize gain on an
exchange to the extent of money and
non-like-kind property received in the
exchange. Personal property received in
a like-kind exchange of real property is
non-like-kind property received in the
exchange. Consequently, under section
1031(b), gain generally must be
recognized to the extent of the personal
property received in the exchange.
The final regulations revise proposed
§ 1.1031(k)–1(g)(7)(iii)(B) slightly to
improve readability; the revision does
not change the meaning of proposed
§ 1.1031(k)–1(g)(7)(iii)(B).
The final regulations include the
incidental property rule to provide
assurance to taxpayers that a qualified
intermediary’s use of exchange proceeds
to acquire incidental personal property
will not cause the taxpayer to fail to
meet the requirements of § 1.1031(k)–
1(g)(6)(i), and thus the requirements of
section 1031. As explained in the
preamble to the proposed regulations,

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the incidental property rule was
proposed to respond to concerns that a
taxpayer would be considered to be in
constructive receipt of all of the
exchange funds held by the qualified
intermediary if the taxpayer is able to
direct the qualified intermediary to use
those funds to acquire property that is
not of a like kind to the taxpayer’s
relinquished property. See generally
part II of the Explanation of Provisions
section in the preamble to the proposed
regulations. The incidental property
rule is intended to help taxpayers
comply with the requirements of section
1031, particularly the prohibition on a
taxpayer’s ability to actually or
constructively receive the proceeds from
the transfer of relinquished property
before receiving like-kind replacement
property.
One commenter recommended that
the final regulations include language
specifically providing that the receipt of
incidental personal property in a section
1031 exchange results in taxable gain to
the taxpayer. The final regulations adopt
this recommendation and add language
in § 1.1031(k)–1(g)(7)(iii) to clarify this
point.
E. Request That 15-Percent Limitation
Not Be Applied on a Property-byProperty Basis
One commenter recommended that
the final regulations clarify that the 15percent limitation for the incidental
property rule is not applied on a
property-by-property basis. For
example, assume a taxpayer acquires an
office building (Building 1) with office
furniture, and a second office building
(Building 2) with no personal property.
The commenter requested that the final
regulations confirm that the taxpayer
does not exceed the 15-percent
limitation if the value of the furniture is
15 percent or less of the total value of
Building 1 and Building 2, even if the
value of the furniture exceeds 15
percent of the value of just Building 1.
The Treasury Department and the IRS
agree with the commenter’s
recommendation. Accordingly, the final
regulations include language to clarify
that the 15-percent limitation is
calculated by comparing the value of all
of the incidental properties to the value
of all of the replacement real properties
acquired in the same exchange.
F. Suggested Language Changes to
Incidental Property Rule
One commenter recommended a
series of language modifications to the
incidental property rule in the proposed
§ 1.1031(k)–1(g)(7)(iii). For example, the
commenter recommended that the rule
for determining whether personal

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property is incidental to real property
acquired in an exchange not reference
the term ‘‘commercial transaction.’’ For
support, the commenter asserted that
the term might be interpreted to include
only contracts involving transfers of
non-residential property such as
commercial real estate and not
residential rental property. In addition,
the commenter suggested that, in the
final regulations, the language ‘‘the
personal property is typically
transferred together with the real
property’’ be replaced with ‘‘the
personal property is typically listed in
the contract and transferred with the
real property.’’
The final regulations do not adopt
these suggested modifications because
the Treasury Department and the IRS
have determined that proposed
§ 1.1031(k)–1(g)(7)(iii) provides clear
guidance for determining whether
personal property is incidental to real
property acquired in an exchange. In
particular, the term ‘‘commercial
transactions’’ refers to transactions
involving business or investment
property rather than personal-use
property. Accordingly, the term
‘‘commercial’’ describes the type of
transaction, not the type of property.
Therefore, a commercial transaction
may involve either residential or nonresidential property.
The final regulations also do not
adopt the commenter’s recommendation
that the language ‘‘the personal property
is typically transferred together with the
real property’’ be replaced with ‘‘the
personal property is typically listed in
the contract and transferred with the
real property.’’ Generally, if personal
property is transferred as part of a
transfer of real property, the personal
property would be listed in the contract
relating to the transfer. However, if a
taxpayer lists the personal property in a
contract separate from the contract
addressing the transfer of real property,
listing the personal property in a
separate contract generally will not
prevent the taxpayer from using the
incidental property rule.

include directing a qualified
intermediary to use exchange proceeds
to acquire non-like-kind property, also
existed for pre-TCJA exchanges under
section 1031. Thus, the commenter
suggested that the incidental property
rule apply to pre-TCJA exchanges.
Prior to enactment of the TCJA,
personal property was eligible for likekind exchange treatment. Therefore, a
rule disregarding the receipt of
incidental personal property in
determining whether a taxpayer was in
constructive receipt of non-like-kind
property prior to enactment of the TCJA
would function in a very different way
than it does post-TCJA. Accordingly,
these final regulations do not adopt this
suggestion.

G. Request To Apply Incidental Property
Rule Retroactively
A commenter also requested that,
under the final regulations, the
incidental property rule apply
retroactively to exchanges after either (i)
the 1984 enactment of the deferred
exchange rules in section 1031(a)(3) or
(ii) the 1991 effective date of the
§ 1.1031(k)–1 deferred exchange final
regulations. The commenter observed
that the concerns that led to the
inclusion of the incidental property rule
in the proposed regulations, which

A. Application of Section 453 of the
Code To Gain on a Transfer of Personal
Property

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H. Requested Clarifications Regarding
Receipt of Personal Property or Escrow
Funds
Commenters requested clarification
regarding the application of the
incidental property rule to cash placed
in escrow to pay transactional and other
items in a real estate transfer. The
Treasury Department and the IRS note
that a taxpayer’s receipt of escrowed
funds that the taxpayer placed in escrow
for transactional-type items is not a
receipt of incidental personal property.
Therefore, the final regulations do not
revise the incidental property rule in
response to the commenters’ request. A
commenter also requested guidance
regarding situations in which an
exchanging taxpayer acquires a
substantial amount of personal property
due to unforeseen circumstances. The
final regulations do not address this
specific situation. The 15-percent
limitation is not a bright-line test for
determining whether a transaction fails
to meet the requirements of an exchange
under section 1031. All of the facts and
circumstances of the taxpayer’s
situation are considered in determining
if the exchange meets the requirements
of section 1031.
IV. Comments That Exceed the Scope of
the Final Regulations

A commenter recommended that the
final regulations provide clarification
regarding the application of section 453
to certain like-kind exchanges.
Specifically, the commenter requested
guidance about the timing of gain
recognition when (i) real property is
exchanged for both like-kind real
property and non-like-kind personal
property incidental to the real property,
and (ii) the exchange is not completed

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until the taxable year succeeding the
taxable year of the transfer of the
relinquished property. The commenter
requested that the final regulations
address whether the gain on the receipt
of the personal property is recognized in
the first or the second taxable year (Tax
Year 1 and Tax Year 2, respectively) if
the like-kind exchange straddles two
taxable years.
The commenter also requested
guidance regarding a situation involving
a taxpayer who (i) has a bona fide intent
to execute a section 1031 exchange, (ii)
transfers relinquished real property and
incidental personal property in Tax
Year 1, and (iii) fails to acquire
replacement property by the 180th day
after the transfer of the relinquished
property, which is in Tax Year 2.
Specifically, the commenter
recommends that the final regulations
address whether the gain on the transfer
of the personal property is recognized in
Tax Year 1 or Tax Year 2.
The Treasury Department and the IRS
appreciate the commenter’s questions
but have determined the commenter’s
requested guidance exceeds the scope of
the final regulations. The issues raised
by the commenter relate to the
application of current § 1.1031(k)–
1(j)(2), which addresses the application
of the installment method of accounting
in section 453 to like-kind exchanges
involving the receipt of non-like-kind
property that straddles two taxable
years, or that would have straddled two
taxable years if successfully completed.
The scope of the final regulations is
limited to the definition of real property
under section 1031 and to incidental
property received in a section 1031
exchange. Accordingly, the final
regulations do not address the issues
relating to the timing of gain recognition
raised by the commenter.
B. Application of Current § 1.1031(j)–1
to Post-TCJA Exchanges
Several commenters inquired about
the application of current § 1.1031(j)–1
to exchanges of multiple properties
following the enactment of the TCJA.
Section 1.1031(j)–1 provides an
exception to the general rule that
section 1031 requires a property-byproperty comparison for computing the
gain recognized and basis of property
received in a like-kind exchange.
Section 1.1031(j)–1 applies when there
is more than one exchange group
created, as described in § 1.1031(j)–
1(b)(2)(i), or, if there is only one
exchange group, there is more than one
property transferred or received within
the exchange group. Under § 1.1031(j)–
1, the amount of gain recognized and
the basis of the properties received by

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a taxpayer are computed after separating
the properties transferred and received
by the taxpayer in the exchange into
exchange groups, in accordance with
the rules in § 1.1031(j)–1(b)(3) and (c),
respectively. In addition, under
§ 1.1031(j)–1(b)(2)(ii), all liabilities
assumed by a taxpayer as part of an
exchange to which § 1.1031(j)–1 applies
are offset against all liabilities of which
the taxpayer is relieved as part of the
exchange.
One commenter asked whether
§ 1.1031(j)–1 applies to a post-TCJA
exchange of real property and personal
property for other real property and
personal property. Under section 1031
as in effect before the TCJA
amendments, § 1.1031(j)–1 would have
applied to this exchange if the
relinquished real property was of a like
kind to the replacement real property,
and the relinquished personal property
was of a like kind to the replacement
personal property. Other commenters
requested the Treasury Department and
the IRS to conclude that § 1.1031(j)–1
will continue to apply in this situation
so that taxpayers will not have to carry
out a property-by-property comparison
for computing gain on the exchange.
Another commenter inquired about
the application of § 1.1031(j)–1 to
exchanges of both qualifying real
property and non-qualifying property
that involve indebtedness encumbering
both types of properties. Specifically,
the commenter asked whether the full
amount of the indebtedness assumed by
the taxpayer would offset the full
amount of the indebtedness liabilities of
which the taxpayer is relieved as part of
the exchange, even if a portion of that
indebtedness relates to the personal
property in the exchange.
The Treasury Department and the IRS
appreciate the issues raised by these
commenters but note that the
application of § 1.1031(j)–1 to
transactions to which the TCJA applies
exceeds the scope of the final
regulations. Therefore, the final
regulations do not address these
comments. The Treasury Department
and the IRS, however, continue to
consider potential future guidance on
issues relating to § 1.1031(j)–1.

Rev. Rul. 2003–56 addresses the
consequences under section 752 of the
Code and § 1.704–2(d) of a section 1031
like-kind exchange that straddles two
taxable years and involves relinquished
and replacement property subject to a
liability. The revenue ruling addresses
whether the liabilities are netted and
which taxable year the net change in a
partner’s share of partnership liability is
taken into account.
Rev. Rul. 2004–86 addresses whether
an interest in a Delaware statutory trust
(DST) is treated as an interest in the real
property owned by the DST, and
whether a taxpayer may exchange real
property for an interest in a DST in a
transaction that qualifies for
nonrecognition of gain under section
1031. The revenue ruling examines the
grantor trust rules of sections 671 and
677 of the Code and the entityclassification rules in section 7701 of
the Code and the section 7701
regulations. Rev. Rul. 2004–86
concludes that, under the facts of the
ruling, including the DST agreement,
the exchange qualifies for
nonrecognition under section 1031.
The Treasury Department and the IRS
appreciate these helpful comments but
have determined that they exceed the
scope of the final regulations. That
scope is limited to the definition of real
property under section 1031 and to
incidental property received in a section
1031 exchange. Both Rev. Rul. 2003–56
and Rev. Rul. 2004–86 address other
issues related to the application of
section 1031.
With regard to Rev. Rul. 2004–86,
nothing in the proposed regulations or
the TCJA is contrary to the view that a
transfer of an interest in a DST, if a
grantor trust, is treated as the transfer of
the underlying property held by the
DST. The Treasury Department and the
IRS, however, will continue to review
existing guidance concerning section
1031 like-kind exchanges to determine
the effect of the TCJA on that guidance.

C. Application of Revenue Rulings
2003–56 and 2004–86
One commenter suggested that Rev.
Rul. 2003–56, 2003–23 I.R.B. 985, likely
needs to be modified to address postTCJA exchanges involving both real and
personal property. The commenter also
questioned whether Rev. Rul. 2004–86,
2004–33 I.R.B. 191, needs to be updated
to address the TCJA changes to section
1031.

A commenter highlighted that
examples in § 1.1031(k)–1(d)(2) include
a computation error. For example, the
sum of $187,500 and $87,500 is
incorrectly provided as $250,000.
Although, the proposed regulations do
not address the rules in § 1.1031(k)–
1(d)(2), this Treasury decision corrects
the scrivener’s error identified by the
commenter by replacing ‘‘$87,500’’ with
‘‘$62,500’’ each place it appears therein.

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D. Computation Error in Examples
Contained in § 1.1031(k)–1(d)(2)

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E. Interaction of Bonus Depreciation
Rules With Section 1031

Washington, DC 20402, or by visiting
the IRS website at http://www.irs.gov.

productive use in a trade or business or
for investment.

One commenter discussed the
interaction between the additional first
year depreciation deduction rules in
section 168 of the Code, commonly
referred to as bonus depreciation, and
the like-kind exchange rules in section
1031, as amended by the TCJA. The
commenter pointed out that there may
be an adverse timing difference between
(i) when gain is recognized on the
transfer of real property that includes
the transfer of personal property, and
(ii) when a taxpayer is allowed a bonus
depreciation deduction for the
acquisition of replacement real property
and personal property subject to bonus
depreciation. The commenter also
asserted that when the 100-percent
bonus depreciation rules expire after
2022, the gain associated with a section
1031 exchange involving real estate
including personal property will be
larger than the gain intended by
Congress.
These comments, while helpful,
exceed the scope of the final
regulations. Accordingly, the final
regulations do not include the guidance
requested by the commenter. However,
the Treasury Department and the IRS
will consider the interaction between
the bonus depreciation rules under
section 168 and the like-kind exchange
rules under section 1031.

Effective/Applicability Date
These final regulations apply to
exchanges beginning after December 2,
2020. A taxpayer may rely on the
proposed regulations (REG–117589–18)
published in the Federal Register on
June 12, 2020 (85 FR 35835), if followed
consistently and in their entirety, for
exchanges of real property beginning
after December 31, 2017, and before
December 2, 2020.

2. Final Regulations
The final rules provide a definition of
real property to distinguish it from
personal property, as the TCJA limited
the nonrecognition of gain or loss in the
case of like-kind exchange to exchanges
of real property. The legislative history
to the TCJA provides that real property
eligible for like-kind exchange treatment
prior to the TCJA should continue to be
eligible for like-kind exchange
treatment. Conference Report, at 396, fn.
726. On June 12, 2020, the Treasury
Department and the IRS published a
notice of proposed rulemaking (REG–
117589–18) in the Federal Register (85
FR 35835) containing proposed
regulations under section 1031
(proposed regulations). The final
regulations retain the basic approach
and structure of the proposed
regulations, with certain revisions. In
particular, the final regulations revise
the definition of ‘‘real property’’ in the
proposed regulations to provide that
property is classified as real property for
section 1031 purposes if, on the date it
is transferred in an exchange, the
property is real property under the law
of the State or local jurisdiction in
which that property is located.
However, property ineligible for likekind exchange treatment after
enactment of the TCJA remains
ineligible for like-kind exchange
treatment after the enactment of the
TCJA regardless of its classification
under the laws of the State or local
jurisdiction. The final regulations also
revise the proposed definition of real
property to eliminate, with regard to
both tangible and intangible properties,
any consideration of whether the
particular property contributes to the
production of income unrelated to the
use or occupancy of space (referred to
as the ‘‘purpose or use test,’’ as defined
in part II.B.1 of this Summary of
Comments and Explanation of
Revisions).
The final regulations retain the rule
relating to personal property in an
exchange that is incidental to the real
property exchange. Under this rule
personal property is incidental to real
property acquired in an exchange if, in
standard commercial transactions, the
personal property is typically
transferred together with the real
property, and the aggregate fair market
value of the incidental personal
property transferred with the real
property does not exceed 15 percent of
the aggregate fair market value of the
replacement real property. This
incidental property rule in the proposed

V. Correction to Preamble of Proposed
Regulations Regarding Kind or Class of
Property
One commenter noted that the
background section of the preamble to
the proposed regulations provides the
following: ‘‘Real property of one kind or
class may not, under section 1031, be
exchanged for real property of a
different kind or class.’’ Proposed
regulations, Background, part III. The
commenter correctly pointed out that
this sentence is inaccurate because
distinguishing between properties of a
different class is relevant to personal
property and whether, under section
1031 prior to enactment of the TCJA,
personal properties were of like kind,
not whether the properties were real
property. Consequently, this sentence is
deleted from part III of the Background
of the preamble to the final regulations.
Statement of Availability of IRS
Documents
The IRS guidance cited in this
preamble is published in the Internal
Revenue Bulletin (or Cumulative
Bulletin) and is available from the
Superintendent of Documents, U.S.
Government Publishing Office,

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Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 12866, 13563, and
13771 direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including (i) potential economic,
environmental, and public health and
safety effects, (ii) potential distributive
impacts, and (iii) equity). Executive
Order 13563 emphasizes the importance
of quantifying both costs and benefits,
reducing costs, harmonizing rules, and
promoting flexibility.
These regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) (MOA) between the Treasury
Department and the Office of
Management and Budget (OMB)
regarding review of tax regulations. The
Office of Information and Regulatory
Affairs (OIRA) has designated these
final regulations as economically
significant under section 1(c) of the
MOA. Accordingly, the OMB has
reviewed these final regulations.
A. Background
1. Like-Kind Exchange
Prior to the amendment of section
1031 by the TCJA, certain exchanges of
personal, intangible, or real property
held for use in a trade or business or for
investment qualified for nonrecognition
under section 1031. Section 13303 of
the TCJA generally limits the
application of like-kind exchange
treatment to exchanges of real property
after December 31, 2017, subject to a
transition rule applicable to exchanges
not completed by January 1, 2018.
Specifically, section 1031 provides that
no gain or loss is recognized on the
exchange of real property held for
productive use in a trade or business or
for investment if the real property is
exchanged solely for real property of a
like kind that is to be held either for

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Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations
regulations is based on an existing rule
in the regulations under section 1031,
which provides that certain incidental
property is ignored in determining
whether a taxpayer has properly
identified replacement property.
3. No-Action Baseline
In this analysis, the Treasury
Department and the IRS assess the
benefits and costs of these final
regulations relative to a no-action
baseline reflecting anticipated Federal
income tax-related behavior in the
absence of these final regulations.
4. Economic Analysis of Final
Regulations
The statutory changes made by the
TCJA to section 1031 limit like-kind
exchanges to real property. The final
regulations provide that property is real
property for purposes of section 1031 if,
on the date it is transferred in an
exchange, that property is classified as
real property under the law of the State
or local jurisdiction in which that
property is located (local law test).
Consequently, under the final
regulations, property is classified as real
property for purposes of section 1031 if
the property is (i) so classified under the
State and local law test, (ii) specifically
listed as real property in the final
regulations, or (iii) considered real
property based on all the facts and
circumstances under the various factors
provided in the final regulations. The
proposed regulations had extracted
certain portions of the definition of real
property from various existing
regulations with the intention that they
are consistent with the legislative
history underlying the TCJA
amendment to section 1031. See, for
example, §§ 1.263(a)–3(b)(3) and 1.856–
10 (defining the term ‘‘real property’’ to
mean land and improvements to land
such as buildings and other inherently
permanent structures, and their
structural components); § 1.263A–8(c)
(providing that real property includes
unsevered natural products of land such
as growing crops and plants, mines
wells and other natural deposits); and
§ 1.856–10(c) (providing, in relevant
part, that the term ‘‘land’’ includes
‘‘water and air space superjacent to
land’’).
The final regulations also eliminate
the purpose or use test for tangible
property to qualify as real property that
was included in the proposed
regulations. If tangible property is
permanently affixed to real property and
will ordinarily remain affixed for an
indefinite period of time, the property is
an inherently permanent structure and
thus real property for section 1031

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purposes, irrespective of the purpose or
use of the property or whether it
contributes to the production of income.
As emphasized in comments received
by the Treasury Department and the
IRS, the proposed regulations may have
caused certain real property that
qualified for like-kind exchange
treatment prior to the enactment of the
TCJA to no longer qualify. The final
regulations more closely follow the
legislative history to the TCJA
amendments to section 1031. See
Conference Report, at 396, fn. 726
(providing that Congress ‘‘intended that
real property eligible for like-kind
exchange treatment under present law
will continue to be eligible for like-kind
exchange treatment under the
[amended] provision’’). The Treasury
Department and the IRS have
determined that using the local law test
and eliminating the purpose or use test
will reduce compliance costs relative to
the proposed rules. As a result,
taxpayers may rely on existing State and
local law definitions of real property or
may look to the specifically listed
property or the various factors provided
in the final regulations.
The Treasury Department and the IRS
have determined that there is not likely
to be a material difference in the
quantity of tangible property that
qualifies as real property eligible for
like-kind exchanges under the two
standards. In making this determination,
the Treasury Department and the IRS
observed that, for an exchange to qualify
for gain-deferral treatment under section
1031, the subject property (that is, the
relinquished property) not only must
constitute ‘‘real property,’’ but also must
be ‘‘like kind’’ with regard to the
property exchanged therefore (that is,
the replacement property). Like-kind
determinations are made pursuant to
Federal, rather than State or local, tax
law. See generally § 1.1031(a)–1(b)
through (d). Consequently, State and
local law definitions of real property, on
their own, affect only one prong of the
section 1031 qualification for exchanges
of property as a result of these final
regulations. In the future, State and
local governments could modify their
tax laws to include additional assets
within the definition of real property.
However, the Treasury Department and
the IRS cannot determine the extent to
which State and local governments may
take such actions. The Treasury
Department and the IRS note that such
actions likely would affect the tax
revenue of those jurisdictions.
Moreover, the final regulations
provide that property ineligible for likekind exchange treatment prior to
enactment of the TCJA remains

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77375

ineligible, including real property that
was excluded from the application of
section 1031. This approach is
consistent with Congressional intent
that ‘‘real property eligible for like-kind
exchange treatment’’ under the law in
effect prior to enactment of the TCJA
will continue to be eligible for like-kind
exchange treatment after enactment of
the TCJA. See Conference Report at 396,
fn. 726. Prior to amendment by the
TCJA, former section 1031(a)(2)
explicitly excluded certain assets from
the application of section 1031.
Accordingly, the final regulations
exclude from the definition of real
property the intangible assets listed in
section 1031(a)(2) prior to its
amendment by the TCJA, regardless of
the classification of the property under
State or local law, because such
property never was ‘‘real property
eligible for like-kind exchange
treatment’’ prior to enactment of the
TCJA. Conference Report at 396, fn. 726.
The final regulations may influence
which intangible assets qualify as real
property for like-kind exchanges relative
the definition in the proposed
regulations. To the extent an intangible
asset derives its value from real property
or an interest in real property, it is
inseparable from that real property or
interest in real property. Accordingly,
the intangible asset does not produce or
contribute to the production of income
other than consideration for the use or
occupancy of space, and therefore may
be real property or an interest in real
property under State or local law. Under
the proposed regulations, the intangible
asset, such as mineral extraction rights
or timber cutting rights, that produces
income other than for the use or
occupancy of space and would not be
considered real property. Under the
final regulations, the mineral rights and
timber cutting rights are real property if
they are considered real property under
State or local law.
The modification of the definition of
real property in the final regulations
aligns the proposed definition to more
closely track the intent of Congress as
described in the Conference Report. The
proposed rules could have had a
significant impact on the amount of
intangible property that previously
qualified for like-kind exchanges. For
example, oil and gas firms accounted for
approximately $4 billion in deferred
gains in 2012. This figure can be viewed
as an upper limit on the size of the
taxable income that the proposed rule
could have excluded from qualifying for
like-kind exchanges as it includes both
developed fields that would have
qualified under the proposed rule and

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mineral rights that may have been
excluded. The proposed rule may have
also affected other intangible real
property such as mineral rights not
associated with oil and gas properties or
timber cutting rights, but these are likely
small when compared to the deferred
gains in the oil and gas industry.
Consistent with longstanding
regulations under section 1031, in
determining whether a taxpayer has
actual or constructive receipt of money
or other property held by a qualified
intermediary, the final regulations
disregard certain incidental personal
property. Specifically, the final
regulations disregard incidental
personal property that (1) in standard
commercial transactions is typically
transferred together with the real
property, and (2) does not exceed 15
percent of the aggregate fair market
value of the replacement real property.
Nonetheless, under section 1031(b), a
taxpayer must recognize gain on the
receipt of the incidental personal
property, which is not like-kind to real
property. The 15-percent limitation is
responsive to ordinary-course exchanges
that often commingle personal property
and real property as part of the aggregate
exchanged property.
With regard to a limitation on the
value of incidental personal property in
excess of 15 percent, the Treasury
Department and the IRS have
determined that a higher limit might
induce taxpayers to bundle more
personal property with their exchanged
property. Such a result would lead to
increased amounts of personal property
exchanged with real property under
section 1031 and effectively unlock a
class of personal property that would no
longer be ‘‘incidental’’ to the real
property. With regard to a lower limit,
the Treasury Department and the IRS
have determined that the burden of
accurately measuring the separate costs
of comingled personal and real property
would increase.
In addition, the final 15 percent
incidental personal property limitation
would reduce the cost of investing in
real property, when compared to no
exchanges for incidental personal
property. Raising this limit, however,
would further increase the tax
incentives for investing in such
property, although most taxpayers will
be indifferent when exchanging
incidental property, plants, and
equipment with a depreciable life of 20
years or less that is eligible for 100
percent additional first year
depreciation, commonly referred to as
‘‘bonus depreciation.’’ Under 100
percent bonus depreciation, gains from
the sale of property can be offset by

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deductions for investment in other
qualifying property. Qualifying property
placed in service after September 27,
2017, and before January 1, 2023,
qualifies for full bonus depreciation.
The bonus depreciation rate is phased
down 20 percent a year for property
placed in service after this date. In the
absence of 100 percent bonus
depreciation, expanding incentives for
like-kind exchange through a higher
incidental personal property limitation
could also distort investment decisions
within and across industries leading to
over-investment in like-kind properties
relative to consistent treatment across
properties.
As part of the economic analysis of
the proposed regulations, the Treasury
Department and the IRS requested
comments and information that would
help further inform the analysis
underlying the proposed 15-percent
limitation for incidental personal
property. See part I.A.4 of the Special
Analyses of the proposed regulations
(85 FR 35840). No comments were
received by the Treasury Department or
the IRS.
The Treasury Department and the IRS
have determined that these final
regulations will not have meaningful
effects regarding the section 1031
qualification of real property exchanges.
Finally, these final regulations do not
significantly affect compliance burdens
as the regulations are substantially
similar to existing regulations affecting
like-kind exchanges for real property.
II. Paperwork Reduction Act
The collection of information in these
final regulations is reflected in the
collection of information for Form 8824,
Like-Kind Exchanges, which has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507(c)) under control numbers
1545–0074. The number of respondents
to Form 8824 for tax year 2018 is
estimated at 125,000–220,000. The
estimated burden for individual
taxpayers filing this form is approved
under OMB control number 1545–0074
and is included in the estimates shown
in the instructions for their individual
income tax return. The estimated
burden for taxpayers who file Form
8824, which has not changed as a result
of these final regulations, is shown
below.
Recordkeeping ..................
Learning about the law or
the form.
Preparing the form ............

10 hr., 16 min.
1 hr., 59 min.
2 hr., 14 min.

Form 8824 is used by taxpayers
engaging in section 1031 like-kind

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exchanges. Beginning after December
31, 2017, section 1031 like-kind
exchange treatment applies only to
exchanges of real property held for use
in a trade or business or for investment,
other than real property held primarily
for sale. Before the law change, section
1031 also applied to certain exchanges
of personal or intangible property.
These final regulations provide a
definition of real property for purposes
of section 1031 and a rule for the receipt
of personal property that is incidental to
real property received in an exchange
and makes conforming changes to the
regulations. The law change reflected in
the final regulations will result in fewer
taxpayers engaging in section 1031 likekind exchanges. This decrease in
burden will be reflected in the updated
burden estimates for the Form 8824. The
requirement to maintain records to
substantiate information on the Form
8824 is already contained in the burden
associated with the control numbers for
those forms and remains unchanged.
For purposes of the Paperwork
Reduction Act, no burden estimates
specific to the final regulations are
currently available. The Treasury
Department has not estimated the
burden, including that of any new
information collections, related to the
requirements under the final
regulations. Those estimates would
capture both changes made by the TCJA
and those that arise out of discretionary
authority exercised in the final
regulations.
The current status of the Paperwork
Reduction Act submissions related to
section 1031 is provided in the
following table. The section 1031
provisions are included in aggregated
burden estimates for OMB control
number 1545–0074, which represents a
total estimated burden time, including
all related forms and schedules, of 1.784
billion hours and total estimated
monetized costs of $31.764 billion
($2017). The burden estimates provided
in the OMB control numbers below are
aggregate amounts that relate to the
entire package of forms associated with
the OMB control number and will in the
future include but not isolate the
estimated burden of only the section
1031 requirements. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by the final regulations. The
Treasury Department and IRS urge
readers to recognize that these numbers
are duplicates and to guard against overcounting the burden that tax provisions
imposed prior to the TCJA. The
Treasury Department and the IRS
request comments on all aspects of

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Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations
information collection burdens related
to the final regulations. In addition,
when available, drafts of IRS forms are
Form 8824 ......

Individual (NEW Model)
1545–0074.

77377

posted for comment at www.irs.gov/
draftforms.
Sixty-day notice published in the Federal Register on 10/30/20 (85 FR 68956). Public Comment
period closes on 12/29/20.

Link: https://www.federalregister.gov/documents/2020/10/30/2020-24139/proposed-extension-of-information-collection-request-submitted-for-public-comment-comment-request.

Form 8824 is also used by members
of the executive branch of the Federal
Government and judicial officers of the
Federal Government to elect to defer
gain under section 1043 on certain sales
of property due to potential conflicts of
interest arising from their status as
government officials. These final
regulations do not address or affect the
deferral of gain on sales under section
1043.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid OMB control number.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and return information are
confidential, as required by 26 U.S.C.
6103.
III. Regulatory Flexibility Act
It is hereby certified that these final
regulations will not have a significant
economic impact on a substantial
number of small entities within the
meaning of section 601(6) of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6).
These final regulations update
existing regulations under section 1031
to reflect statutory changes made to
section 1031 by the TCJA. Section 1031
provides that a taxpayer exchanging
investment property or property held for
productive use in a trade or business for
other investment or trade or business
property recognizes gain only to the
extent of money or non-like-kind
property received in the exchange, and
recognizes no loss on the exchange.
Under the TCJA amendments to section
1031, for years after 2017, section 1031
applies only to exchanges of real
property and no longer applies to
exchanges of personal property and
certain intangible property. The final
regulations provide a definition of real
property to be used in determining
whether a taxpayer has met the
requirements of section 1031. In so
doing, the final regulations follow the
legislative history underlying the TCJA
amendment to section 1031 providing

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that real property eligible for like-kind
exchange treatment under pre-TCJA law
continues to be eligible for like-kind
exchange treatment in years beginning
after 2017.
Consequently, the final regulations
use a State or local law test and certain
aspects from existing regulatory
definitions of real property in a manner
consistent with the legislative history
underlying the TCJA amendment to
section 1031 requiring that the
definition of real property remain the
same both before and after enactment of
the TCJA. Taxpayers already are familiar
with these rules, which provide that real
property includes land, improvements
to land, unsevered natural products of
land, and water and air space
superjacent to land. In addition, the
final regulations provide a rule
addressing a taxpayer’s receipt of
personal property that is incidental to
the real property the taxpayer receives
in the exchange that is based on an
existing rule in § 1.1031(k)–1.
Individuals and business entities that
own investment real property or real
property held for productive use in a
trade or business may engage in a
section 1031 exchange. The provisions
of section 1031 apply in the same
manner to all taxpayers, so the effect of
the final regulations is the same for
taxpayers that are small entities and
taxpayers that are not small entities. The
small entities potentially impacted by
these regulations are businesses
organized as corporations (including S
corporations), partnerships, and
individuals that file a Form 1040
Schedule C for their respective trades or
businesses or Form 1040 Schedule E for
their rental real estate.
The number of small entities
potentially affected by these final
regulations is unknown but likely
substantial because like-kind exchanges
are entered into by entities of all sizes.
Although a substantial number of small
entities is potentially affected by these
final regulations, the Treasury
Department and the IRS have concluded
that the final regulations will not have
a significant economic impact on a
substantial number of small entities
because the costs to comply with these
final regulations are not significant. This

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is because for taxpayers still able to
engage in section 1031 exchanges, there
are no additional forms they are
required to file, and there is no new
recordkeeping required, to comply with
section 1031 as amended by the TCJA
and these final regulations other than
the time to read and understand these
regulations. Thus, taxpayers that engage
in like-kind exchanges of real property
in 2018 and later years will not have
any additional burden as compared to
taxpayers engaging in like-kind
exchanges in years before 2018.
Accordingly, the Secretary certifies that
these final regulations will not have a
significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f), the notice
of proposed rulemaking preceding this
final regulation was submitted to the
Chief Counsel for the Office of
Advocacy of the Small Business
Administration for comment on its
impact on small business (85 FR 35835).
No comments on the notice were
received from the Chief Counsel for the
Office of Advocacy of the Small
Business Administration.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a State, local, or tribal government,
in the aggregate, or by the private sector,
of $100 million in 1995 dollars, updated
annually for inflation. In 2020, that
threshold is approximately $156
million. This rule does not include any
mandate that may result in expenditures
by State, local, or tribal governments, or
by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State
law, unless the agency meets the

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consultation and funding requirements
of section 6 of the Executive Order. This
rule does not have federalism
implications and does not impose
substantial, direct compliance costs on
State and local governments or preempt
State law within the meaning of the
Executive Order.

List of Subjects in 26 CFR Part 1

VI. Congressional Review Act
The Administrator of OIRA has
determined that this Treasury decision
is a major rule for purposes of the
Congressional Review Act (5 U.S.C. 801
et seq.) (CRA). Under section 801(3) of
the CRA, a major rule takes effect 60
days after the rule is published in the
Federal Register.
Notwithstanding this requirement,
section 808(2) of the CRA allows
agencies to dispense with the
requirements of section 801 when the
agency for good cause finds that such
procedure would be impracticable,
unnecessary, or contrary to the public
interest and the rule shall take effect at
such time as the agency promulgating
the rule determines. Pursuant to section
808(2) of the CRA, the Treasury
Department and the IRS find, for good
cause, that a 60-day delay in the
effective date is unnecessary and
contrary to the public interest.
Following the amendments to section
1031 by the TCJA, the Treasury
Department and the IRS published the
proposed regulations to provide
certainty to taxpayers. In particular, and
as emphasized by the wide variety of
public comments received in response
to the proposed regulations, taxpayers
lacked certainty regarding the
longstanding role of State and local law
in real property determinations for
purposes of qualification under section
1031. Consistent with Executive Order
13924 (May 19, 2020), the Treasury
Department and the IRS have
determined that an expedited effective
date of the final regulations would ‘‘give
businesses, especially small businesses,
the confidence they need to re-open by
providing guidance on what the law
requires.’’ 85 FR 31353–4. Accordingly,
the Treasury Department and the IRS
have determined that the rules in this
Treasury decision shall take effect on
the date of publication in the Federal
Register.

PART 1—INCOME TAXES

Drafting Information
The principal authors of these
regulations are Edward C. Schwartz and
Suzanne R. Sinno of the Office of
Associate Chief Counsel (Income Tax
and Accounting). However, other
personnel from the Treasury
Department and the IRS participated in
their development.

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Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:

Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *

*
*
*
*
Par. 2. Section 1.168(i)–1 is amended
by:
■ 1. In the last sentence in paragraph
(e)(2)(viii)(A), removing ‘‘does not
apply.’’ at the end of the sentence and
adding ‘‘and the distinct asset
determination under § 1.1031(a)–3(a)(4)
do not apply.’’ in its place;
■ 2. In the first sentence in paragraph
(m)(1), removing the word ‘‘This’’ at the
beginning of the sentence and adding
‘‘Except as provided in paragraph (m)(5)
of this section, this’’ in its place; and
■ 3. Redesignating paragraph (m)(5) as
paragraph (m)(6) and adding new
paragraph (m)(5).
The addition reads as follows:

(5) Application of paragraph (c)(4)(i).
The language ‘‘and the distinct asset
determination under § 1.1031(a)–3(a)(4)
do not apply.’’ in the last sentence of
paragraph (c)(4)(i) of this section applies
on or after December 2, 2020. Paragraph
(c)(4)(i) of this section as contained in
26 CFR part 1 edition revised as of April
1, 2020, applies before December 2,
2020.
■ Par. 4. Section 1.1031–0 is amended
by revising the entry for § 1.1031(a)–1(e)
and adding entries for § 1.1031(a)–3 to
read as follows:

*

§ 1.1031–0

Table of contents.

■

*

*

§ 1.168(i)–1

General asset accounts.

*

*
*
*
*
(m) * * *
(5) Application of paragraph
(e)(2)(viii)(A). The language ‘‘and the
distinct asset determination under
§ 1.1031(a)–3(a)(4) do not apply.’’ in the
last sentence of paragraph (e)(2)(viii)(A)
of this section applies on or after
December 2, 2020. Paragraph
(e)(2)(viii)(A) of this section as
contained in 26 CFR part 1 edition
revised as of April 1, 2020, applies
before December 2, 2020.
■ Par. 3. Section 1.168(i)–8 is amended
by:
■ 1. In the last sentence in paragraph
(c)(4)(i), removing ‘‘does not apply’’ at
the end of the sentence and adding ‘‘and
the distinct asset determination under
§ 1.1031(a)–3(a)(4) do not apply’’ in its
place;
■ 2. At the beginning of paragraph (j)(1),
removing the word ‘‘This’’ and adding
‘‘Except as provided in paragraph (j)(5)
of this section, this’’ in its place;
■ 3. Redesignating paragraph (j)(5) as
paragraph (j)(6) and adding new
paragraph (j)(5).
The addition reads as follows:
§ 1.168(i)–8
property.

*

Dispositions of MACRS

*
*
(j) * * *

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*

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*

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*

*

*

§ 1.1031(a)–1 Property held for productive
use in a trade or business or for
investment.

*

*

*

*

*

(e) Applicability dates.

*

*

*

*

*

§ 1.1031(a)–3 Definition of real property.
(a) Real property.
(b) Examples.
(c) Applicability date.

*

*
*
*
*
Par. 5. Section 1.1031(a)–1 is
amended by adding paragraph (a)(3) and
revising paragraph (e) to read as follows:

■

§ 1.1031(a)–1 Property held for productive
use in trade or business or for investment.

(a) * * *
(3) Exchanges after 2017. Pursuant to
section 13303 of Public Law 115–97
(131 Stat. 2054), for exchanges
beginning after December 31, 2017,
section 1031 and §§ 1.1031(a)–1,
1.1031(b)–2, 1.1031(d)–1T, 1.1031(d)–2,
1.1031(j)–1, 1.1031(k)–1, and references
to section 1031 in §§ 1.1031(b)–1,
1.1031(c)–1, and 1.1031(d)–1, apply
only to qualifying exchanges of real
property (within the meaning of
§ 1.1031(a)–3) that is held for productive
use in a trade or business, or for
investment, and that is not held
primarily for sale.
*
*
*
*
*
(e) Applicability dates—(1) Exchanges
of partnership interests. The provisions
of paragraph (a)(1) of this section
relating to exchanges of partnership
interests apply to transfers of property
made by taxpayers on or after April 25,
1991.
(2) Exchanges after 2017. The
provisions of paragraph (a)(3) of this
section apply to exchanges beginning
after December 2, 2020.
■ Par. 6. Section 1.1031(a)–3 is added to
read as follows:
§ 1.1031(a)–3

Definition of real property.

(a) Real property—(1) In general. The
term real property under section 1031
and §§ 1.1031(a)–1 through 1.1031(k)–1

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means land and improvements to land,
unsevered natural products of land, and
water and air space superjacent to land.
Under paragraph (a)(5) of this section,
an intangible interest in real property of
a type described in this paragraph (a)(1)
is real property for purposes of section
1031 and this section. Property that is
real property under State or local law as
provided in paragraph (a)(6) of this
section is real property for purposes of
section 1031 and this section.
(2) Improvements to land—(i) In
general. The term improvements to land
means inherently permanent structures
and the structural components of
inherently permanent structures.
(ii) Inherently permanent structures—
(A) In general. The term inherently
permanent structure means any
building or other structure that is a
distinct asset within the meaning of
paragraph (a)(4) of this section and is
permanently affixed to real property and
that will ordinarily remain affixed for an
indefinite period of time. Affixation is
considered permanent if it is reasonably
expected to last indefinitely based on all
the facts and circumstances.
(B) Building. A building is any
structure or edifice enclosing a space
within its walls, and covered by a roof,
the purpose of which is, for example, to
provide shelter or housing, or to provide
working, office, parking, display, or
sales space. Buildings include the
following distinct assets if permanently
affixed: Houses, apartments, hotels,
motels, enclosed stadiums and arenas,
enclosed shopping malls, factories and
office buildings, warehouses, barns,
enclosed garages, enclosed
transportation stations and terminals,
and stores.
(C) Other inherently permanent
structures. Inherently permanent
structures under paragraph (a)(2)(ii) of
this section include the following
distinct assets, if permanently affixed:
In-ground swimming pools; roads;
bridges; tunnels; paved parking areas,
parking facilities, and other pavements;
special foundations; stationary wharves
and docks; fences; inherently permanent
advertising displays for which an
election under section 1033(g)(3) is in
effect; inherently permanent outdoor
lighting facilities; railroad tracks and
signals; telephone poles; power
generation and transmission facilities;
permanently installed
telecommunications cables; microwave
transmission, cell, broadcasting, and
electric transmission towers; oil and gas
pipelines; offshore platforms, derricks,
oil and gas storage tanks; and grain
storage bins and silos. Affixation to real
property may be accomplished by
weight alone. If property is not listed as

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an inherently permanent structure in
paragraph (a)(2)(ii)(B) or (C) of this
section, the determination of whether
the property is an inherently permanent
structure under paragraph (a)(2)(ii) of
this section is based on the following
factors—
(1) The manner in which the distinct
asset is affixed to real property;
(2) Whether the distinct asset is
designed to be removed or to remain in
place;
(3) The damage that removal of the
distinct asset would cause to the item
itself or to the real property to which it
is affixed;
(4) Any circumstances that suggest the
expected period of affixation is not
indefinite; and
(5) The time and expense required to
move the distinct asset.
(iii) Structural components—(A) In
general. The term structural component
means any distinct asset, within the
meaning of paragraph (a)(4) of this
section, that is a constituent part of, and
integrated into, an inherently permanent
structure. If interconnected assets work
together to serve an inherently
permanent structure (for example,
systems that provide a building with
electricity, heat, or water), the assets are
analyzed together as one distinct asset
that may be a structural component. A
structural component may qualify as
real property only if the taxpayer holds
its interest in the structural component
together with a real property interest in
the space in the inherently permanent
structure served by the structural
component. If a distinct asset is
customized, the customization does not
affect whether the distinct asset is a
structural component. Tenant
improvements to a building that are
inherently permanent or otherwise
classified as real property within the
meaning of this paragraph (a)(2)(iii) are
real property under this section.
However, property produced for sale,
such as bricks, nails, paint, and
windowpanes, that is not real property
in the hands of the producing taxpayer
or a related person, as defined in section
1031(f)(3), but that may be incorporated
into real property by an unrelated buyer,
is not treated as real property by the
producing taxpayer.
(B) Examples of structural
components. Structural components
include the following items, provided
the item is a constituent part of, and
integrated into, an inherently permanent
structure: Walls; partitions; doors;
wiring; plumbing systems; central air
conditioning and heating systems; pipes
and ducts; elevators and escalators;
floors; ceilings; permanent coverings of
walls, floors, and ceilings; insulation;

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chimneys; fire suppression systems,
including sprinkler systems and fire
alarms; fire escapes; security systems;
humidity control systems; and other
similar property. If a component of a
building or inherently permanent
structure is a distinct asset and is not
listed as a structural component in this
paragraph (a)(2)(iii)(B), the
determination of whether the
component is a structural component
under this paragraph (a)(2)(iii) is based
on the following factors—
(1) The manner, time, and expense of
installing and removing the component;
(2) Whether the component is
designed to be moved;
(3) The damage that removal of the
component would cause to the item
itself or to the inherently permanent
structure to which it is affixed; and
(4) Whether the component is
installed during construction of the
inherently permanent structure.
(3) Unsevered natural products of
land. Unsevered natural products of
land, including growing crops, plants,
and timber; mines; wells; and other
natural deposits, generally are treated as
real property for purposes of this
section. Natural products and deposits,
such as crops, timber, water, ores, and
minerals, cease to be real property when
they are severed, extracted, or removed
from the land.
(4) Distinct asset—(i) In general. For
this section, a distinct asset is analyzed
separately from any other assets to
which the asset relates to determine if
the asset is real property, whether as
land, an inherently permanent structure,
or a structural component of an
inherently permanent structure.
Buildings and other inherently
permanent structures are distinct assets.
Assets and systems listed as a structural
component in paragraph (a)(2)(iii)(B) of
this section are treated as distinct assets.
(ii) Facts and circumstances. The
determination of whether a particular
separately identifiable item of property
is a distinct asset is based on all the
facts and circumstances. In particular,
the following factors must be taken into
account—
(A) Whether the item is customarily
sold or acquired as a single unit rather
than as a component part of a larger
asset;
(B) Whether the item can be separated
from a larger asset, and if so, the cost of
separating the item from the larger asset;
(C) Whether the item is commonly
viewed as serving a useful function
independent of a larger asset of which
it is a part; and
(D) Whether separating the item from
a larger asset of which it is a part

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impairs the functionality of the larger
asset.
(5) Intangible assets—(i) In general.
Intangible assets that are real property
for purposes of section 1031 and this
section include the following items: Fee
ownership; co-ownership; a leasehold;
an option to acquire real property; an
easement; stock in a cooperative
housing corporation; shares in a mutual
ditch, reservoir, or irrigation company
described in section 501(c)(12)(A) of the
Code if, at the time of the exchange,
such shares have been recognized by the
highest court of the State in which the
company was organized, or by a State
statute, as constituting or representing
real property or an interest in real
property; and land development rights.
Similar interests are real property for
purposes of section 1031 and this
section if the intangible asset derives its
value from real property or an interest
in real property and is inseparable from
that real property or interest in real
property. The following intangible
assets are not real property for purposes
of section 1031 and this section,
regardless of the classification of such
property under State or local law—
(A) Stock not described in paragraph
(a)(5)(i) of this section, bonds, or notes;
(B) Other securities or evidences of
indebtedness or interest;
(C) Interests in a partnership (other
than an interest in a partnership that has
in effect a valid election under section
761(a) to be excluded from the
application of all of subchapter K);
(D) Certificates of trust or beneficial
interests; and
(E) Choses in action.
(ii) Licenses and permits. A license,
permit, or other similar right that is
solely for the use, enjoyment, or
occupation of land or an inherently
permanent structure and that is in the
nature of a leasehold, easement, or other
similar right, generally is an interest in
real property under this section.
However, a license or permit to engage
in or operate a business on real property
is not real property or an interest in real
property, regardless of its classification
under State or local law.
(6) State or local law. Except as
otherwise provided in paragraph (a)(5)
of this section, property is real property
within the meaning of paragraph (a)(1)
of this section under State or local law
if, on the date it is transferred in an
exchange, the property is real property
under the law of the State or local
jurisdiction in which that property is
located.
(7) No inference outside of section
1031. The rules provided in this section
concerning the definition of real
property apply only for purposes of

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section 1031. No inference is intended
with respect to the classification or
characterization of property for other
purposes of the Code, such as
depreciation and sections 1245 and
1250. For example, a structure or a
portion of a structure may be section
1245 property for depreciation purposes
and for determining gain under section
1245, notwithstanding that the structure
or the portion of the structure is real
property under this section. Also, a
taxpayer transferring relinquished
property that is section 1245 property in
a section 1031 exchange is subject to the
gain recognition rules under section
1245 and the regulations under section
1245, notwithstanding that the
relinquished property or replacement
property is real property under this
section. In addition, the taxpayer must
follow the rules of section 1245 and the
regulations under section 1245, and
section 1250 and the regulations under
section 1250, based on the
determination of the relinquished
property and replacement property
being, in whole or in part, section 1245
property or section 1250 property under
those Code sections and not under this
section.
(b) Examples. The following examples
illustrate the provisions of this section.
In each example, unless otherwise
provided, the State or local law of the
applicable jurisdiction in which the
property at issue is located does not
address whether the property is real
property.
(1) Example 1: Natural products of
land. A owns land with perennial fruitbearing plants that A harvests annually.
The unsevered plants are natural
products of the land within the meaning
of paragraph (a)(3) of this section and
thus are real property for purposes of
section 1031. A annually harvests fruit
from the plants. Upon severance from
the land, the harvested fruit ceases to be
part of the land and therefore is not real
property. Storage of the harvested fruit
upon or within real property does not
cause the harvested fruit to be real
property.
(2) Example 2: Water space
superjacent to land. B owns a marina
comprised of U-shaped boat slips and
end ties. The U-shaped boat slips are
spaces on the water that are surrounded
by a dock on three sides. The end ties
are spaces on the water at the end of a
slip or on a long, straight dock. B rents
the boat slips and end ties to boat
owners. The boat slips and end ties are
water space superjacent to land and
thus are real property within the
meaning of paragraph (a)(1) of this
section.

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(3) Example 3: Indoor sculpture. (i) C
owns an office building and a large
sculpture in the atrium of the building.
The sculpture measures 30 feet tall by
18 feet wide and weighs five tons. The
building was specifically designed to
support the sculpture, which is
permanently affixed to the building by
supports embedded in the building’s
foundation. The sculpture was
constructed within the building.
Removal would be costly and time
consuming and would destroy the
sculpture. The sculpture is reasonably
expected to remain in the building
indefinitely.
(ii) The sculpture is not an inherently
permanent structure listed in paragraph
(a)(2)(ii)(C) of this section, and,
therefore, C must use the factors
provided in paragraphs (a)(2)(ii)(C)(1)
through (5) of this section to determine
whether the sculpture is an inherently
permanent structure. The sculpture—
(A) Is permanently affixed to the
building by supports embedded in the
building’s foundation;
(B) Is not designed to be removed and
is designed to remain in place
indefinitely;
(C) Would be damaged if removed and
would damage the building to which it
is affixed;
(D) Is expected to remain in the
building indefinitely; and
(E) Would require significant time and
expense to move.
(iii) The factors described in
paragraphs (a)(2)(ii)(C)(1) through (5) of
this section all support the conclusion
that the sculpture is an inherently
permanent structure within the meaning
of paragraph (a)(2)(ii)(A) of this section.
Therefore, the sculpture is real property.
(4) Example 4: Bus shelters. (i) D
owns 400 bus shelters, each of which
consists of four posts, a roof, and panels
enclosing two or three sides. D enters
into a long-term lease with a local
transit authority for use of the bus
shelters. Each bus shelter is
prefabricated from steel and is bolted to
the sidewalk. Bus shelters are
disassembled and moved when bus
routes change. Moving a bus shelter
takes less than a day and does not
significantly damage either the bus
shelter or the real property to which it
was affixed.
(ii) The bus shelters are not
permanently affixed enclosed
transportation stations or terminals, are
not buildings under paragraph
(a)(2)(ii)(B) of this section, nor are they
listed as types of other inherently
permanent structures in paragraph
(a)(2)(ii)(C) of this section. Therefore,
the bus shelters must be analyzed to
determine whether they are inherently

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permanent structures using the factors
provided in paragraphs (a)(2)(ii)(C)(1)
through (5) of this section. The bus
shelters—
(A) Are not permanently affixed to the
land or an inherently permanent
structure;
(B) Are designed to be removed and
not remain in place indefinitely;
(C) Would not be damaged if removed
and would not damage the sidewalks to
which they are affixed;
(D) Will not remain affixed
indefinitely; and
(E) Would not require significant time
and expense to move.
(iii) The factors described in
paragraphs (a)(2)(ii)(C)(1) through (5) of
this section all support the conclusion
that the bus shelters are not inherently
permanent structures within the
meaning of paragraph (a)(2)(ii) of this
section. Thus, the bus shelters are not
inherently permanent structures within
the meaning of paragraph (a)(2)(ii) of
this section and, therefore, are not real
property.
(5) Example 5: Industrial 3D printer
and generator. (i) E owns a building that
it uses in its trade or business of
manufacturing airplane parts. The
building includes an industrial 3D
printer that can print airplane wings
and an electrical generator that serves
the building and the 3D printer in a
backup capacity. The 3D printer weighs
12 tons, is designed to remain in place
indefinitely once installed in the
building, and its removal would be
time-consuming and very costly, and
would cause significant damage to the
building. The 3D printer was installed
during the building’s construction. The
generator also was installed during
construction and is designed to remain
in place indefinitely once installed.
Although costly and time-consuming to
remove, removal of the generator will
not result in substantial damage to the
generator or the building.
(ii) The 3D printer is not listed as an
example of a structural component
under paragraph (a)(2)(iii)(B) of this
section. Therefore, the 3D printer must
be analyzed to determine whether it is
a structural component using the factors
provided in paragraphs (a)(2)(iii)(B)(1)
through (4) of this section. The 3D
printer—
(A) Is time-consuming and costly to
move;
(B) Is not designed to be moved;
(C) If removed, would cause
significant damage to the building in
which it is located; and
(D) Was installed during construction
of the building.
(iii) The factors described in
paragraphs (a)(2)(iii)(B)(1) through (4) of

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this section support the conclusion that
the 3D printer is a structural component
of E’s building and real property under
this section. Thus, the 3D printer is real
property.
(iv) The electrical generator also is not
listed as an example of a structural
component under paragraph
(a)(2)(iii)(B) of this section and must be
analyzed to determine whether it is a
structural component using the factors
provided in paragraphs (a)(2)(iii)(B)(1)
through (4) of this section. The
generator—
(A) Is time-consuming and costly to
move;
(B) Is not designed to be moved;
(C) If removed, would not result in
significant damage to the generator or
the building in which it is located; and
(D) Was installed during construction
of the building.
(v) The factors described in
paragraphs (a)(2)(iii)(B)(1) through (4) of
this section, considered in the aggregate,
support the conclusion that the
generator is a structural component of
E’s building. Although the generator’s
removal would not result in significant
damage to the generator or to E’s
building, that factor does not outweigh
the factors supporting the conclusion
that it is a structural component.
Consequently, the generator is a
structural component of E’s building
and real property under this section.
(6) Example 6: Raised flooring for
industrial 3D printer. (i) The facts are
the same as in paragraph (b)(5), Example
5, except that E, when installing its 3D
printer, also installed a raised flooring
system for the purpose of facilitating the
operation of the 3D printer. The raised
flooring system is not designed or
constructed to remain permanently in
place. Rather, the raised flooring system
can be removed, without any substantial
damage to the system itself or to the
building, and then reused. The raised
flooring was installed during the
building’s construction.
(ii) Although floors are listed as an
example of a structural component
under paragraph (a)(2)(iii)(B) of this
section, the raised flooring system
installed to facilitate the operation of E’s
3D printer is not a constituent part of,
and integrated into, an inherently
permanent structure as required by
paragraph (a)(2)(iii)(A) of this section
and, therefore, is not flooring as listed
in paragraph (a)(2)(iii)(B) of this section.
Thus, the raised flooring must be
analyzed to determine whether it is a
structural component of E’s building
(within the meaning of paragraph
(a)(2)(iii) of this section) using the
factors provided in paragraphs

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(a)(2)(iii)(B)(1) through (4) of this
section. The raised flooring—
(A) Is installed and removed quickly
and with little expense;
(B) Is designed to be moved and is not
designed specifically for the particular
building of which it is a part;
(C) Is not damaged, and the building
is not damaged, upon its removal; and
(D) Was installed during construction
of the building.
(iii) The factors described in
paragraphs (a)(2)(iii)(B)(1) through (4) of
this section, considered in the aggregate,
support the conclusion that the raised
flooring is not a structural component of
E’s building within the meaning of
paragraph (a)(2)(iii) of this section.
Although the raised flooring was
installed during construction of the
building, that factor does not outweigh
the factors supporting the conclusion
that the flooring is not a structural
component. Therefore, the raised
flooring is not real property.
(7) Example 7: Steam turbine. (i) F
owns a building with a large steam
turbine attached as a fixture to the
building. The steam turbine is a
component of a system used for the
commercial production of electricity for
sale to customers in the ordinary course
of F’s business as an electric utility. The
steam turbine also generates electricity
for F’s building. The steam turbine takes
up a substantial portion of the building
and is designed to remain in place
indefinitely once installed in F’s
building. The steam turbine was
installed during the construction of the
building and its removal would be
costly and cause damage to the building.
(ii) The steam turbine is not listed as
an example of a structural component
under paragraph (a)(2)(iii)(B) of this
section and must be analyzed to
determine whether it is a structural
component using the factors provided in
paragraphs (a)(2)(iii)(B)(1) through (4) of
this section. The steam turbine—
(A) Is costly to remove from the
building in which it is located;
(B) Is not designed to be moved;
(C) If removed, would cause damage
to the building; and
(D) Was installed during construction
of the building.
(iii) The factors described in
paragraphs (a)(2)(iii)(B)(1) through (4) of
this section support the conclusion that
the steam turbine is a structural
component of F’s building and real
property under this section. Thus, the
steam turbine is real property.
(8) Example 8: Partitions. (i) G owns
an office building that it leases to
tenants. The building includes
partitions owned by G that are used to
delineate space within the building. The

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office building has two types of interior,
non-load-bearing drywall partition
systems: A conventional drywall
partition system (Conventional Partition
System) and a modular drywall
partition system (Modular Partition
System). Neither the Conventional
Partition System nor the Modular
Partition System was installed during
construction of the office building.
Conventional Partition Systems are
comprised of fully integrated gypsum
board partitions, studs, joint tape, and
covering joint compound. Modular
Partition Systems are comprised of
assembled panels, studs, tracks, and
exposed joints. Both the Conventional
Partition System and the Modular
Partition System reach from the floor to
the ceiling. In addition, both are distinct
assets as described in paragraph (a)(4) of
this section.
(ii) Depending on the needs of a new
tenant, the Conventional Partition
System may remain in place when a
tenant vacates the premises. The
Conventional Partition System is
integrated into the office building and is
designed and constructed to remain in
areas not subject to reconfiguration or
expansion. The Conventional Partition
System can be removed only by
demolition, and, once removed, neither
the Conventional Partition System nor
its components can be reused. Removal
of the Conventional Partition System
causes substantial damage to the
Conventional Partition System itself, but
does not cause substantial damage to the
building.
(iii) Modular Partition Systems are
typically removed when a tenant
vacates the premises. Modular Partition
Systems are not designed or constructed
to remain permanently in place.
Modular Partition Systems are designed
and constructed to be movable. Each
Modular Partition System can be readily
removed, remains in substantially the
same condition as before, and can be
reused. Removal of a Modular Partition
System does not cause any substantial
damage to the Modular Partition System
itself or to the building. The Modular
Partition System may be moved to
accommodate the reconfigurations of
the interior space within the office
building for various tenants that occupy
the building.
(iv) The Conventional Partition
System is comprised of walls that are
integrated into an inherently permanent
structure and are listed as structural
components in paragraph (a)(2)(iii)(B) of
this section. Thus, the Conventional
Partition System is real property.
(v) The Modular Partition System is
not integrated into the building as
required by paragraph (a)(2)(iii)(A) of

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this section and, therefore, is not listed
in paragraph (a)(2)(iii)(B) of this section.
Thus, the Modular Partition System
must be analyzed to determine whether
it is a structural component using the
factors provided in paragraphs
(a)(2)(iii)(B)(1) through (4) of this
section. The Modular Partition
System—
(A) Is installed and removed quickly
and with little expense;
(B) Is designed to be moved and is not
designed specifically for the particular
building of which it is a part;
(C) Is not damaged, and the building
is not damaged, upon its removal; and
(D) Was not installed during
construction of the building.
(vi) The factors described in
paragraphs (a)(2)(iii)(B)(1) through (4) of
this section support the conclusion that
the Modular Partition System is not a
structural component of G’s office
building within the meaning of
paragraph (a)(2)(iii) of this section.
Therefore, the Modular Partition System
is not real property.
(9) Example 9: Pipeline transmission
system. (i) H owns a natural gas pipeline
transmission system that provides a
conduit to transport natural gas from
unrelated third-party producers and
gathering facilities to unrelated thirdparty distributors and end users. The
pipeline transmission system is
comprised of underground pipelines,
isolation valves and vents, pressure
control and relief valves, meters, and
compressors. Each of these distinct
assets was installed during construction
of the pipeline transmission system and
each was designed to remain
permanently in place.
(ii) The pipelines are permanently
affixed and are listed as other inherently
permanent structures in paragraph
(a)(2)(ii)(C) of this section. Thus, the
pipelines are real property.
(iii) Isolation valves and vents are
placed at regular intervals along the
pipelines to isolate and evacuate
sections of the pipelines in case there is
need for a shut-down or maintenance of
the pipelines. Pressure control and relief
valves are installed at regular intervals
along the pipelines to provide
overpressure protection. The isolation
valves and vents and pressure control
and relief valves are not listed in
paragraph (a)(2)(iii)(B) of this section
and, therefore, must be analyzed to
determine whether they are structural
components using the factors provided
in paragraphs (a)(2)(iii)(B)(1) through (4)
of this section. The isolation valves and
vents and pressure control and relief
valves—

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(A) Are time consuming and
expensive to install and remove from
the pipelines;
(B) Are designed specifically for the
particular pipelines for which they are
a part;
(C) Will sustain damage and will
damage the pipelines if removed; and
(D) Were installed during
construction of the pipelines.
(iv) The factors in paragraphs
(a)(2)(iii)(B)(1) through (4) of this
section support the conclusion that the
isolation valves and vents and pressure
control and relief valves are structural
components of H’s pipelines within the
meaning of paragraph (a)(2)(iii) of this
section. Therefore, the isolation valves
and vents and pressure control and
relief valves are real property.
(v) Meters are used to measure the
natural gas passing into or out of the
pipeline transmission system for
purposes of determining the end users’
consumption. Over long distances,
pressure is lost due to friction in the
pipeline transmission system.
Compressors are required to add
pressure to transport natural gas through
the entirety of the pipeline transmission
system. H installed meters and
compressors during the construction of
the pipelines. However, unlike other
types of such meters and compressors,
these particular meters and compressors
are not time consuming and expensive
to install and remove from the
pipelines; are not designed specifically
for the particular pipelines for which
they are a part; and their removal does
not cause damage to the asset or the
pipelines if removed. Therefore, the
meters and compressors installed by H
are not structural components within
the meaning of paragraph (a)(2)(iii) of
this section and, therefore, are not real
property.
(10) Example 10: State or local law
determination of property. (i) J owns
water pipeline in State X that it wants
to exchange for cell phone towers
located in State Y. On the date that J
transfers the water pipeline in an
exchange for the cell phone towers, the
water pipeline is classified as real
property under the law of State X, the
jurisdiction in which the water pipeline
is located.
(ii) The water pipeline is real property
under paragraphs (a)(1) and (a)(6) of this
section, regardless of whether the water
pipeline is listed as an inherently
permanent structure or a structural
component of an inherently permanent
structure, or is real property under the
factors listed in paragraph (a)(2)(ii)(C) or
(a)(2)(iii)(B) of this section.
(iii) Cell phone towers are listed as an
inherently permanent structure under

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Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations
paragraph (a)(2)(ii)(C) of this section.
Thus, the cell phone towers that J
acquires in the exchange for the water
pipeline are real property under this
section, regardless of the State or local
characterization of the cell phone
towers or whether the cell phone towers
are real property under the factors in
paragraph (a)(2)(ii)(C) or (a)(2)(iii)(B) of
this section.
(11) Example 11: Land use permit. K
receives a special use permit from the
government to place a cell tower on
Federal Government land that abuts a
Federal highway. Government
regulations provide that the permit is
not a lease of the land, but is a permit
to use the land for a cell tower. Under
the permit, the government reserves the
right to cancel the permit and
compensate K if the site is needed for
a higher public purpose. The permit is
in the nature of a leasehold that allows
K to place a cell tower in a specific
location on government land. Therefore,
the permit is an interest in real property
under paragraph (a)(5) of this section.
(12) Example 12: License to operate a
business. L owns a building and
receives a license from State A to
operate a casino in the building. The
license applies only to K’s building and
cannot be transferred to another
location. L’s building is an inherently
permanent structure under paragraph
(a)(2)(ii)(A) of this section and,
therefore, is real property. However, L’s
license to operate a casino is not a right
for the use, enjoyment, or occupation of
L’s building, but is rather a license to
engage in or operate the casino business
in the building. Therefore, the casino
license is not real property or an interest
in real property under paragraph
(a)(5)(ii) of this section.
(c) Applicability date. This section
applies to exchanges beginning after
December 2, 2020.
■ Par. 7. Section 1.1031(k)–1 is
amended by:
■ 1. In paragraph (d)(2), removing
‘‘$87,500’’ and adding in its place
‘‘$62,500’’ each place it appears;
■ 2. Removing ‘‘, and’’ at the end of
paragraph (g)(7)(i) and adding a
semicolon in its place;
■ 3. Removing the period at the end of
paragraph (g)(7)(ii) and adding ‘‘; and’’
in its place;
■ 4. Adding paragraph (g)(7)(iii);
■ 5. In paragraph (g)(8), designating
Examples 1 through 5 as paragraphs
(g)(8)(i) through (v), respectively;
■ 6. In newly designated paragraph
(g)(8)(i):
■ a. Redesignating paragraph (g)(8)(i)(i)
as paragraph (g)(8)(i)(A);
■ b. In newly designated paragraph
(g)(8)(i)(A), redesignating paragraphs

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(g)(8)(i)(A)(A) and (B) as paragraphs
(g)(8)(i)(A)(1) and (2), respectively;
■ c. Designating the undesignated
paragraph immediately following newly
redesignated paragraph (g)(8)(i)(A)(2) as
paragraph (g)(8)(i)(A)(3); and
■ d. In newly designated paragraph
(g)(8)(i) redesignating paragraph
(g)(8)(i)(ii) as paragraph (g)(8)(i)(B);
■ 7. In newly designated paragraph
(g)(8)(ii):
■ a. Redesignate old paragraph (i) as
paragraph (A);
■ b. Redesignate old paragraph (A) as
paragraph (1);
■ c. Redesignate old paragraphs (1) and
(2) as paragraphs (i) and (ii),
respectively;
■ d. Redesignate old paragraphs (B) and
(C) as paragraphs (2) and (3),
respectively;
■ e. Designating the undesignated
paragraph immediately following newly
redesignated paragraph (g)(8)(ii)(A)(3) as
paragraph (g)(8)(ii)(A)(4); and
■ f. Redesignate old paragraphs (ii) and
(iii) as paragraphs (B) and (C),
respectively;
■ 8. In newly designated paragraph
(g)(8)(iii), redesignating old paragraphs
(i) through (v) as paragraphs (A) through
(E), respectively;
■ 9. In newly designated paragraph
(g)(8)(iv), redesignating old paragraphs
(i) through (iii) as paragraphs (A)
through (C), respectively;
■ 10. In newly designated paragraph
(g)(8)(v), redesignating old paragraphs
(i) through (iii) as paragraphs (A)
through (C), respectively;
■ 11. Adding paragraph (g)(8)(vi); and
■ 12. Adding paragraph (g)(9).
The additions read as follows:
§ 1.1031(k)–1
exchanges.

Treatment of deferred

*

*
*
*
*
(g) * * *
(7) * * *
(iii) Personal property generally
resulting in gain recognition under
section 1031(b) that is incidental to real
property acquired in an exchange. For
purposes of this paragraph (g)(7),
personal property is incidental to real
property acquired in an exchange if—
(A) In standard commercial
transactions, the personal property is
typically transferred together with the
real property; and
(B) The aggregate fair market value of
the property described in paragraph
(g)(7)(iii)(A) of this section transferred
with the real property does not exceed
15 percent of the aggregate fair market
value of the replacement real property
or properties received in the exchange.
*
*
*
*
*
(8) * * *

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(vi) Example 6. (A) In 2020, B
transfers to C real property with a fair
market value of $1,100,000 and an
adjusted basis of $400,000. B’s
replacement property is an office
building and, as a part of the exchange,
B also will acquire certain office
furniture in the building that is not real
property, which is industry practice in
a transaction of this type. The fair
market value of the real property B will
acquire is $1,000,000 and the fair
market value of the personal property is
$100,000.
(B) In a standard commercial
transaction, the buyer of an office
building typically also acquires some or
all of the office furniture in the building.
The fair market value of the personal
property B will acquire does not exceed
15 percent of the fair market value of the
office building B will acquire.
Accordingly, under paragraph (g)(7)(iii)
of this section, the personal property is
incidental to the real property in the
exchange and is disregarded in
determining whether the taxpayer’s
rights to receive, pledge, borrow or
otherwise obtain the benefits of money
or non-like-kind property are expressly
limited as provided in paragraph (g)(6)
of this section. Upon the receipt of the
personal property, B recognizes gain of
$100,000 under section 1031(b), the
lesser of the realized gain on the
disposition of the relinquished property,
$700,000, and the fair market value of
the non-like-kind property B acquired in
the exchange, $100,000.
(9) Applicability date. Paragraphs
(g)(7)(iii) and (g)(8)(vi) of this section
apply to exchanges beginning after
December 2, 2020.
*
*
*
*
*
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: November 18, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2020–26313 Filed 11–30–20; 4:15 pm]
BILLING CODE 4830–01–P

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