BACKGROUND On February 21, 2014, then House Ways and Means Committee Chairman Dave Camp (R-Michigan) issued a discussion draft of the “Tax Reform Act of 2014.” The proposed legislation spanned almost 1,000 pages and contained some interesting provisions, including repealing IRC §1031, thereby prohibiting tax deferral from like-kind exchanges. Not only would taxpayers have been impacted by this proposal, but it would have turned the real estate industry upside down.

The recently issued final IRS like-kind exchange regulations adopt some comments (Winners), reject some comments (Losers), and do not consider some comments because they are beyond the scope of the regulation project (Punts).Regulations are needed because the 2017 Tax Cut and Jobs Act (TCJA, also called the Tax Act) limited like-kind exchanges occurring after 2017 to “real property held for productive use in a trade or business or investment.” IRC § 1031 does not define the term “real property.” The main purpose of the regulations has been to define the term “real property,” especially with regard to the exchange of personal property (including fixtures) and intangible property that are often part of a real property transaction.

Using a Delaware Statutory Trust Investment to Defer Tax In a Like Kind ExchangeThe headwinds in the domestic real estate market have raised the profile of a relatively unknown but powerful investment strategy: exchanging actively managed real estate for a passive interest in a Delaware statutory trust (or “DST”) through a tax-deferred like kind exchange under Section 1031 of the Internal Revenue Code (the “IRC”).By using this strategy, a real estate investor can: (1) exit an existing real estate holding, (2) postpone the payment of capital gains tax, and (3) maintain exposure to the real estate sector through an investment with a sponsor who selects and manages the properties (all the while paying the investor a relatively stable income).For mom-and-pop entrepreneurs who own the shop building, the siblings who inherited real estate from their parents, to the long-time real estate investor seeking to finally take on a passive role, exchanging into such a strategy combines tax efficiency with stable income amidst the most challenging real estate market since the Great Recession.Deferring the Payment of Tax Through A Like Kind ExchangeGenerally when an interest in appreciated property is sold, the taxpayer pays capital gains tax on the appreciation in value, which is referred to in tax parlance as the “realized gain.” Where the taxpayer sells improved real property (which is a fancy

Table of Contents Recent Case Illustrates Importance of Keeping Legal Entities in Good Standing Estate Loses Charitable Contribution Set-aside Deduction Tax Court Has Another Opportunity to Decide Character of Gain Realized from Sale of Real Property Exchanges of Works of Art under IRC Section 1031 IRS Explains Mortgage Interest Deduction When Home Has Multiple Owners Life After Death: No Longer Inconceivable California Film and Television Tax Credit Program Expanded California Superior Court Holds that Out-of-State Corporation Was Not Engaged in Business in California Keeping Important Information Organized and Accessible Estate Planning for Your Digital Assets Proposals to Repeal IRC Section 1031 Again Pending in CongressRecent Case Illustrates Importance of Keeping Legal Entities in Good Standing A recent United States Tax Court case illustrates the importance of keeping legal entities in good standing. In Medical Weight Control Specialists (TC Memo 2015-52), the taxpayer corporation received a statutory notice of deficiency from the IRS.

In some instances, the efforts have resulted in significant losses. With proper due diligence, many of these losses could have been prevented.A TALE OF IRC §1031 EXCHANGES GONE WRONG Tax deferral efforts under IRC §1031 have often resulted in significant losses for unwary taxpayers. The best examples of these losses resulted from the mass Qualified Intermediary failures we saw over the last two decades.

It cited as legal authority the Renkenmeyer case, where law firm partners who practice law full time were limited partners in their law partnership. The Tax Court in that case determined that the term “limited partner” for purposes of the self-employment tax was intended to be restricted to persons in the nature of passive investors, not those actively involved in the day-to-day operations of the business.Section 1031 Exchange Runs Afoul of Related Party Prohibition In the recent case of Malulani Group, the Tax Court held that the taxpayer’s attempt to structure an IRC Section 1031 exchange ran afoul of the related party provisions of IRC Section 1031(f). The purpose of these rules is to prevent taxpayers from exchanging low tax basis property with a related party in return for high tax basis property that was owned by the related party.

As reported in my November 2014 blog post, President Obama’s administration wants to limit taxpayers’ ability to defer income under IRC §1031. In response to former House Ways and Means Committee Chairman David Camp’s proposed Tax Reform Act of 2014, which would have eliminated IRC §1031 altogether, the Obama administration proposed to retain the code section, but limit deferral with regard to real property exchanges to $1 million per taxpayer each tax year.

On September 27, 2022, the Pennsylvania Department of Revenue (“DOR”) issued a revision of Personal Income Tax Bulletin 2006-07 (the “Bulletin”), which confirms that recent Pennsylvania legislation reversed longstanding caselaw that disallowed deferral of gain recognition for like-kind exchanges. Under Act 53 of 2022, the Commonwealth now conforms with section 1031 of the Internal Revenue Code (“IRC 1031”) for Pennsylvania income tax purposes.Under general income tax principles, when property is sold for a profit, the seller must pay tax on the gain recognized from the sale. IRC 1031 provides an exception to this general principle, however, when two parties exchange similar or “like-kind” real property that is used for business or held as an investment. For example, if Party A owns Building 1 and Party B owns Building 2, rather than selling the buildings and having to pay tax the year the sales occur, A and B can exchange the buildings to one another and defer the gain recognition and tax owed.The DOR’s Bulletin provides that like-kind exchanges will now be given similar treatment in Pennsylvania for tax years beginning after December 31, 2022.However, the Bulletin also makes clear that this deferral of gain applies only in the context of income tax. Pennsylvania taxpayers who engage in like-kind exchanges after 2022 will still be required to pay sales and use tax and trans

On April 9, 2020, the IRS issued Notice 2020-23 providing sweeping tax filing and tax payment deferral until July 15, 2020. This relief includes extensions of the 45- and 180-day deadlines for IRC §1031 exchange transactions and the 180-day deadline for deferring capital gains by investing in a qualified opportunity fund.Here are the key points about the extensions.What is the relief for taxpayers who are engaged in IRC §1031 exchanges?If a taxpayer began (or begins) an IRC §1031 exchange between February 16, 2020, and May 30, 2020, the taxpayer’s 45-day replacement property identification deadline is extended to July 15, 2020.If a taxpayer began an IRC §1031 exchange between October 4, 2019, and January 16, 2020, the taxpayer’s 180-day exchange deadline is extended to July 15, 2020.

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