IRS final regulations regarding Section 1031 like-kind exchanges

On November 23, 2020, the IRS posted final regulations (TD 9935) on its website in regards to changes in the the rules for like-kind exchanges of real estate under IRS Code Section 1031.


Under the Tax Cuts and Jobs Act (TCJA), several amendments were made to Section 1031 rules for the like-kind exchange of real property, as follows:

  • Limited the exchange rules to include only exchanges of real property
  • The deferral rules are no longer allowed for an exchange of property that is held primarily for sale
  • Stated that real property located in the United States is not considered to be like-kind to real property located outside the United States

New guidance

The new release that came out last month provides additional clarification to these new rules. Below are the key clarifications included in the final regulations:

  • Elimination of the purpose or use test in the regulations
  • Adding a definition of real property
  • List of intangible property that is considered real property
  • 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.

Elimination of purpose or use test

Real property includes land and improvements to land, both permanent structures and structural components of inherently permanent structures. The earlier prpoosed regulations also took into consideration the function of the property in determining whether it is real property per section 1031. Tangible property, such as machinery or equipment, nor intangible property were classified as real property if the property contributes to the production of income unrelated to the use or occupancy of the space. The following example was included in the earlier guidance:

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.

IRS Publication TD 9935

Based on feedback from commenters on the proposed regulations challenging the need for the purpose or use test and the cost of cost segregation studies that would be required, the Treasury Department and the IRS agreed and have eliminated the purpose or use test.

Definition of real property

Per the new guidance, “ 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 eliminate, with regard to both tangible and intangible properties, any consideration whether the property contributes to the production of income (i.e. purpose or use test). Finally, although the IRS is following state or local definitions of real property, the regulations do exclude from the definition intangible assets listed in section 1031(a)(2) prior to its amendment of TCJA, regardless of state or local law.

Intangible property as real property

The final regulations include the following intangible assets as real property defined in section 1031:

  • Fee ownership interests
  • Co-ownership interests
  • Leasehold interests
  • Option to acquire real property
  • Easements
  • Stock held by a person as a tenant-stockholder in a cooperative housing corporation
  • Rights to develop land
  • Licenses, permits, or other similar rights that are solely for the use, enjoyment, or occupation of land or an inherently permanent structure

Incidental property exception

The proposed regulations issued earlier this year provided for the receipt of personal property that is incidental to the taxpayer’s replacement real property. Personal property is considered to be incidental to real property acquired in an exchange if both of the following are true:

  • In standard commercial transactions, the personal property is typically transferred together with the real property.
  • The aggregate fair market value of the incidental personal property transferred with real property does not exceed 15% of the aggregate fair market value of the replacement real property.

The final regulations clarified that the 15% limitation is to be applied in the aggregate for the transaction and not on a property-by-property basis.


The final regulations on like-kind exchanges are a reflection of the Treasury Department and the IRS accepting constructive feedback on the changes in the TCJA, with the final regulations reflecting feedback received after the preliminary regulations were issued. The full 75-page regulations can be found at the following link:

Tax regulations related to real estate are complex. If you need assistance working through these types of issues, give The Seay Firm CPAs a call. We specialize in real estate, and we can help you figure out the best tax strategy for your situation.

The Seay Firm CPAs was officially launched today!

I am excited today to announce the launch of The Seay Firm CPAs in northwest Arkansas. You can read the press release below.

A New Virtual CPA Firm Opens in Northwest Arkansas

The Seay Firm CPAs will leverage technology to interact and serve new clients

November 30, 2020

Brent A. Seay, CPA has recently relocated back to northwest Arkansas and has opened The Seay Firm CPAs PLLC.  And because of the pandemic and need to limit face-to-face contact, the firm will initially operate virtually to serve clients.  “With today’s technology and tools such as remote access and web conferencing tools such as whiteboards, webcams, and chat, I am confident The Seay Firm can provide excellent client service while working remotely in these challenging times,” said Seay.

A native of Arkansas, Brent has spent most of the past 30 years in northwest Arkansas.  He began his career in public accounting, including two years at the former Barclay, Yarborough & Scott in Rogers, before beginning a 25-year career at Walmart.  At Walmart, Brent held numerous management and executive roles in internal audit, accounting, corporate finance, and international real estate.  Brent has spent the past 2 ½ years as Vice President Financial Accounting and Business Processes for Smartcentres Real Estate Investment Trust, one of the largest REITs in Canada.

The Seay Firm will focus on tax planning and preparation for individuals and small businesses, accounting and bookkeeping services, and virtual/part-time CFO services.  The firm has also recently entered into an agreement with Stone Financial & Tax Centers to assist that firm in managing its Eureka Springs office, including responsibility for providing CFO services to the Eureka Springs Hospital.

With Seay’s extensive background in real estate development, he will also be providing more in-depth services to real estate and construction firms in northwest Arkansas.  “Taxes for real estate owners and developers are very complex, and I believe I can bring a unique perspective as someone who has spent a considerable portion of my career working through these types of challenging issues,” said Seay.

Brent, his wife Bella, and their son Finlay live in Pea Ridge.

About The Seay Firm CPAs PLLC

Founded in 2020 by Brent A. Seay, CPA, The Seay Firm is a full-service accounting firm, providing tax planning and preparation, accounting, bookkeeping and payroll services.  Please visit for more information.