Paul L. Caron

Thursday, April 18, 2019

Borden: Section 1031, The Section 199A Regulations, Bonus Depreciation, The Proposed Regulations, And Ozone Drop-Swap Cash-Outs

Bradley T. Borden (Brooklyn), Code Sec. 1031, the Final Code Sec. 199A Regulations, Bonus Depreciation Proposed Regulations, and Ozone Drop-Swap Cash-Outs, 22 J. Passthrough Entities 19 (Feb. 2019):

Several provisions of the TCJA of 2017 affect Code Sec. 1031. The final regulations under Code Sec. 199A and the proposed bonus deprecation regulations provide guidance regarding the interaction of those provisions and Code Sec. 1031. This article explores those interactions, explaining how the final regulations under Code Sec. 199A use a step-in-the-shoes approach for both the unadjusted basis in the replacement property and its depreciable period. The proposed bonus depreciation regulations apply to Code Sec. 1031, but the application will be limited. As the article explains, Code Sec. 1031 only applies to real property, and the bonus depreciation generally only applies to MACRS property with a recovery period of 20 years or less that is original-use property or that satisfies the used property acquisition requirement.

Some exchange property will fall within that intersection of the two provisions, but most will not. The article discusses the limited application the bonus depreciation to Code Sec. 1031 replacement property for those instances to which it applies. Finally, the article considers whether the tax benefits under the new qualified opportunity fund (QOF) regime provide planning opportunities for partnerships that would otherwise consider doing a drop-swap cash-out. For instance, a typical drop-swap cash-out under Code Sec. 1031 might include a partnership distributing an undivided interest in its property to one partner who will sell that interest for cash while the other partners remain in the partnership and cause it to exchange the remaining interests in the property as part of a Code Sec. 1031 exchange. The QOF regime now allows partners to consider reinvesting gain proceeds in a QOF instead of doing a Code Sec. 1031 exchange while also cashing out other members. The article presents ways in which partners may such structure such drop-swap cash-outs with QOFs, which by definition hold property in qualified opportunity zones.

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