The tax code seems to be constantly changing, and that applies to the rules regarding 1031 exchanges too. Do vehicles still qualify for a 1031 exchange? That’s what this article will discuss.
What Is a 1031 Exchange?
A 1031 exchange is a tool used by real estate investors that allows them to swap one investment property for another and defer capital gains or losses or capital gains taxes that would otherwise apply at the time of sale. Sometimes a 1031 exchange is also called a Starker exchange or like-kind exchange. Section 1031 can apply to property beyond real estate.
How a 1031 Exchange Works
A seller can delay capital gains taxes by selling a property and putting the money towards a property similar in nature and value. This is the process:
Identify the property you want to sell and buy.
Choose a qualified intermediary, known as an exchange facilitator. The intermediary holds the funds in escrow until the exchange is completed.
Notify the IRS of the transaction via Form 8824 with your tax return. On the form, you’ll detail the properties, the timeline of the transactions, who was involved in the process, and the money involved.
Relinquish the property.
Buy the replacement property.
Vehicles and 1031 Exchanges
As of January 1, 2018, under the 2017 Tax Cuts and Jobs Act (TCJA), exchanges of personal or intangible property like machinery, equipment, artwork, collectibles, patents, and other intellectual property, and yes, vehicles generally no longer qualify for nonrecognition of gain or loss as 1031 exchanges. Those exchanges now result in taxable gain or loss in the year of the exchange.
There is a bit of a silver lining, though. The TCJA includes depreciation provisions that help counter the loss of the 1031 exchange benefits, and some of the provisions are specific to vehicles. In some cases, the provisions will give you a better year-one tax savings on vehicles than you would have received with a 1031 exchange.
The TCJA increased the level of bonus depreciation percentage from 50% to 100% for qualified property acquired and placed into service after September 27, 2017, and before January 1, 2023. Before the TCJA, used property wasn’t eligible for bonus depreciation. But after September 27, 2017, property acquired in used condition but of first use to the taxpayer generally qualifies for 100% bonus depreciation.
TCJA also increased the depreciation limits for passenger vehicles placed into service after December 31, 2017. A passenger vehicle includes any four-wheeled vehicle made for primary use on public streets, roads, and highways that has an unloaded gross vehicle rating of 6,000 pounds or less.
So no, vehicles no longer qualify for a 1031 exchange but the depreciation limits for them have been increased.
