Tax News In A Nutshell - 11.30.20
What’s Up in Washington, D.C.?
No news is not always good news - we still have no movement on another stimulus package while many families and businesses continue to struggle after CARES Act provisions expired. Coronavirus vaccines are making headlines, but it still may take some time for the economy to return to normal. Pieces of relief could find their way into a spending bill required by December 11th to keep the government open. Experts say that a second round of PPP, additional unemployment benefits, and direct payments would be the best options.
Mnuchin Out – Yellen In
President-elect Joe Biden has identified Janet Yellen has his selection for the next Treasury Secretary. Yellen served as the Chair of the Federal Reserve from 2014 to 2018, with a long history in prominent economic roles, including Chair of the White House Council of Economic Advisers under President Clinton. If confirmed, Yellen would reportedly aim to bring the Federal Reserve and Treasury closer together and also encourage a new round of stimulus legislation.
But the transition to a new administration has had a bumpy start as current Treasury Secretary Steven Mnuchin recently requested unused CARES Act money in the hands of the Federal Reserve be returned to Treasury into a general account, where it cannot be utilized by a successor without approval from Congress. The move has drawn criticism, but Mnuchin has stated his reason for doing so was to make the money available to help small businesses and expand unemployment, rather than provide further loan funding from the Fed.
Read more on Yellen’s Likes and Dislikes here.
LKE Final Regulations Provide Important Changes
Like-kind exchanges (LKEs) that allow a deferral of tax on gain received final regulations, modifying the definition of real property, removing the purpose or use test for tangible property, and discussing the receipt of personal property considered to be incidental to the real property transaction. The TCJA’s change to §1031 removed personal property from qualifying for LKE treatment beginning in 2018, leaving only real property exchanges eligible for potential gain deferral. With that change came the need to define real property and discuss interactions with personal property for these purposes.
Proposed regulations issued in June made a first pass, but the final regulations include some modifications. In defining real property, the proposed regulations said State and local definitions would not apply, but final regs reverse that approach and provide that generally “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).”
That is not the only definition, however, and the final regulations provide that in summary “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 as real property under the factors listed in §1.1031(a)-3(a)(2)(ii)(C) or (a)(2)(iii)(B).”
The final regulations also remove the “purpose or use test” for tangible property that was provided in the proposed regulations, stating that tangible property permanently affixed to real property is considered an inherently permanent structure qualifying as real property for §1031 purposes.
And finally, if personal property is received that is incidental to the taxpayer’s overall §1031 exchange involving a qualified intermediary, it will be disregarded in determining if the transaction is qualifying. Incidental is defined as not exceeding 15 percent of the aggregate FMV of the replacement real property. However, the regulations remind that incidental personal property “is non-like-kind property that generally results in gain recognition under section 1031(b) on the exchange.”
Definitions of real property found in the regulations only apply to §1031 and there should be no inference for determining asset classifications for other purposes.
Think you know the tax code? I commend you! The Federal Tax Code in its entirety is said to be over 3.8M words long! Add in regulations, revenue rulings, revenue procedures, notices, Tax Court cases, each state’s different rules and you’ve got reading material for the rest of your life!
Don’t get stressed if you haven’t memorized every rule – just know where to look!
(source unknown for that pic or I'd give it credit!)
Information provided is primarily for educational purposes and attempted entertainment, not to be used as tax advice. Consult your advisor for how the information may apply to your unique situation.