• Broad definition of “real property”
• Licenses, permits included

The IRS has taken a taxpayer-friendly view of property still eligible for capital gains tax deferral when exchanged for similar items after the 2017 tax law restricted that treatment.

In rules (REG-117589-18) released Thursday, the agency offered an extensive definition of what can qualify as “real property” under tax code Section 1031. The list includes land and improvements to land, as well as “unsevered” natural products of land like timber, mines, plants, and wells.

“It’s a very broad definition and many practitioners will be happy with the inclusion of inherently permanent structures being broadly defined, and also the inclusion of certain intangible property,” said Richard Lipton, a partner with Baker McKenzie LLP in Chicago. The proposed rules, he added, “are not things people are going to be screaming about.”

Structural components of permanent structures would qualify. For instance, gas lines that fuel a building’s heating system would count, but gas lines that fuel equipment like ovens and fryers wouldn’t, nor would what “is essentially an item of machinery or equipment,” according to the rules.

The special tax treatment would still apply to some intangible property as well, such as licenses and permits, as long as they are “solely for the use, enjoyment, or occupation of land or an inherently permanent structure,” the rules said.

Ryan McCormick, senior vice president and counsel at the Real Estate Roundtable, said in an email that the inclusion of these intangible items was appropriate, and called a proposed safe harbor for incidental personal property that make up part of the real property exchange helpful.

“Like-kind exchanges are even more important during periods of economic stress, like today, when traditional financing is less reliable,” McCormick said.

The definition largely adheres to lawmakers’ intent, as laid out in the 2017 tax code overhaul’s conference report, as well as existing regulations, according to the text.

For like-kind property transactions, a replacement property must be found within 45 days of the sale of property generating capital gains tax to get the special treatment; the purchase of the new property must be completed within 180 days of that sale. The IRS has already extended to July 15 deadlines that would have fallen between April 1 and that date, in response to concerns related to the Covid-19 economic fallout.