Proposed regulations clarify ‘real property’ for Section 1031 like-kind exchange limitations

Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), property other than “real property” was eligible for like-kind exchange treatment under Section 1031 of the Internal Revenue Code (IRC). The TCJA limited the application of like-kind exchange treatment to only exchanges of real property completed after Dec. 31, 2017, subject to a transition rule for certain exchanges in which property had been transferred before Jan. 1, 2018. 

It is common for an amount of personal property to be transferred along with real property in an exchange or sale. The TCJA changes that limited taxpayers to exchanges of real property left taxpayers uncertain as to what impact the receipt of any personal property in a real property exchange would have on the eligibility of like-kind exchange treatment.  

The TCJA changes also left taxpayers uncertain of what constitutes “real property” for purposes of the like-kind exchange rules, as the term was not defined in Section 1031 before or after the TCJA modification or in the existing regulations under Section 1031. Real property has been defined for purposes of other IRC sections, but it was unclear if any of these definitions should apply for purposes of Section 1031. 

The regulations proposed by the U.S. Department of Treasury on June 11, 2020, provide guidance on the effect of receiving personal property that is incidental to the taxpayer’s replacement real property. Additionally, the proposed regulations provide a definition of real property and describe various tests to determine if property may be treated as “real property” even if such property is not explicitly enumerated in the examples provided. 

Personal property received in an exchange

The proposed regulations provide that personal property that is incidental to real property acquired in an exchange is disregarded in determining whether the taxpayer has received property that is not like-kind. “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% of the aggregate fair market value of the replacement real property,” the proposed regulations say. The proposed regulations note that this rule was based on a similar existing rule in the regulations that provides that certain incidental property is ignored in determining whether a taxpayer has properly identified replacement property.

Definition of “real property” for purposes of IRC Section 1031

Under the proposed regulations, “real property” for purposes of IRC Section 1031 means land and improvements to land, unsevered crops and other natural products of land, and water and air space superjacent to land, as well as interests in real property including fee ownerships, co-ownerships, leaseholds, options to acquire real property, easements, or similar interests. Each of these may be eligible for nonrecognition under IRC Section 1031. With limited exception, local law definitions are not controlling when determining the meaning of “real property.”  

How certain improvements to real property may qualify as “real property”

For purposes of IRC Section 1031, improvements to land are considered “real property,” but they must be either 1) inherently permanent structures or 2) structural components of inherently permanent structures. 

Inherently permanent structures

Inherently permanent structures include buildings and other distinct assets that are permanently affixed to real property, even by weight alone, and will likely remain that way indefinitely. 

Examples of inherently permanent structures given in the proposed regulations include: in-ground swimming pools; roads; bridges; tunnels; paved parking areas, parking facilities, and other pavements; stationary wharves and docks; fences; certain permanent advertising displays or outdoor lighting; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunication cables; microwave transmission, cell, broadcasting, and electric transmission towers; oil and gas pipelines; offshore drilling platforms, derricks, and oil and gas storage tanks; grain storage bins and silos; and enclosed transportation stations and terminals. 

For property not listed above, the proposed regulations provide the following five factors to determine whether the property is an inherently permanent structure: 

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.” 

Structural components of inherently permanent structures

Structural components of inherently permanent structures are also considered “real property” for purposes of IRC Section 1031. These are distinct assets that are “a constituent part of, and integrated into, an inherently permanent structure.” 

Examples of structural components in the proposed regulations include: walls; doors; wiring; plumbing systems; central air conditioning or heating systems; pipes and ducts; elevators or escalators; floors; ceilings; permanent coverings of walls, floors, or ceilings; insulation; chimneys; fire suppression systems (including sprinkler systems and fire alarms); fire escapes; security systems; humidity control systems; and other similar property. 

For components not specifically listed above, the proposed regulations provide the following four factors to determine whether the component is a structural component (and can thereby qualify as “real property” for IRC Section 1031 purposes):

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 the construction of the inherently permanent structure.” 

Distinct assets

Whether items of property are considered distinct assets involves a facts and circumstances analysis. According to the proposed regulations, the following factors must be considered: 

1. “Whether the item is customarily sold or acquired as a single unit rather than as a component part of a larger asset; 

2. “Whether the item can be separated from a larger asset, and if so, the cost of separating the item from the larger asset; 

3. “Whether the item is commonly viewed as serving a useful function independent of a larger asset of which it is a part; and 

4. “Whether separating the item from a larger asset of which it is a part impairs the functionality of the larger asset.” 


Machinery is generally not considered “real property.” However, machinery may be considered real property if it is included as part of a building or other inherently permanent structure and it serves the structure and is not an income-producing asset other than for the use or occupancy of space. 

Intangible assets 

To be considered “real property,” an intangible asset must both derive its value from and be inseparable from real property or an interest in real property. Additionally, the intangible asset must not produce or contribute to the production of income except for the use or occupancy of space. 

Licenses, permits, or other similar rights that are in the nature of an easement or leasehold can be considered “real property” if held solely for the use, enjoyment, or occupation of land or an inherently permanent structure. However, these also must not be used to produce or contribute to the production of income except for the use or occupancy of space.

What does CohnReznick think?

The proposed regulations address uncertainty regarding how to treat incidental amounts of personal property received in an exchange. Additionally, they provide a definition of “real property” that was needed after the TCJA modifications. The definition offers welcome guidance but has many elements that add complexity to executing valid like-kind exchanges under Section 1031 and the regulations thereunder. The new guidance in the proposed regulations applies to exchanges beginning on or after the date the regulations are published as final in the Federal Register, but taxpayers may rely on them before then if they are followed “consistently and in their entirety.” Please consult your tax advisor for how these newly proposed regulations may affect you and your business. 


Patrick Duffany, JD, CPA, Managing Partner, Tax


Brian Newman, CPA, Partner, Practice Leader, Federal Tax Services


Subject matter expertise

  • Patrick Duffany headshot
    Contact Patrick Patrick+Duffany
    Patrick Duffany

    CPA, JD, Managing Partner - Tax

  • Brian Newman
    Contact Brian Brian+Newman
    Brian Newman

    CPA, Partner, Practice Leader, Federal Tax Services

  • Close


    Let’s start a conversation about your company’s strategic goals and vision for the future.

    Please fill all required fields*

    Please verify your information and check to see if all require fields have been filled in.

    Please select job function
    Please select job level
    Please select country
    Please select state
    Please select industry
    Please select topic

Related services

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.