CREJ

January 6-19, 2021 - Page 27 www.crej.com Law & Accounting as buildings and other inher- ently permanent structures are distinct assets, as are assets and systems listed as types of structural components. A dis- tinct asset must be identified separately from other assets to establish whether the asset qualifies as real property, using the following factors: • Whether the asset is nor- mally sold separately or as part of a larger asset; • Whether the asset can be separated from the larger asset, and at what cost; • Whether the asset performs a separate function indepen- dent of the larger asset; and • Whether the larger asset would be impaired if it were separated. Examples of inherently per- manent structures include buildings and other structures that remain affixed to the land for an indefinite period (such as roads, parking facilities, etc.). A structural component is any distinct asset that is a con- stituent part of, and integrated into, an inherently permanent structure. Where assets are intercon- nected and function together to serve an inherently permanent structure (e.g., systems that provide a building with elec- tricity, heat or water), the assets must be analyzed together as a single distinct asset that may qualify as a structural compo- nent and therefore constitute real property. The final regu- lations include a list of items that are specifically identified as structural components, includ- ing permanent coverings of walls, floors and ceilings, eleva- tors and escalators, insulation and chimneys. The regulations include an example of a gas line that provides fuel to a building’s heating system and is part of the structural component of the heating system and thus quali- fies as real property for pur- poses of the like-kind exchange rules. However, if the purpose of the gas line is to provide fuel to the business equipment in a building (for example, ovens in a building that is used as a restaurant), the gas line is not a constituent part of an inherently permanent structure and there- fore not real property. If property is not included in the list of inherently perma- nent structures, the final regu- lations set out other factors to make this determination: • The manner in which the asset is affixed to the real prop- erty; •Whether the asset isdesigned to be moved; • The amount of damage that would be caused if the asset was removed; • Any facts that would sug- gest that affixation of the asset to real property is not indefinite; and • The time and expense require to move the asset. When discussing what quali- fies as real property, it is equally important to define what it is not. For example, while machin- ery and equipment normally are not considered real prop- erty (they are considered per- sonal property in other code sections, such as the sections on depreciation), for purposes of the like-kind exchange rules, machinery and equipment can be considered real property if they are structural components of a building or an inherently permanent structure (examples include heating, ventilation, air- conditioning, elevators, security systems and plumbing). As explained above, the final regulations include unsevered natural products of land with- in the definition of real prop- erty. Such products are grow- ing crops, plants, timber, mines, wells and other natural deposits, but only while they still are in the ground (e.g., once natural gas is extracted or timber is cut, the item ceases to be real prop- erty). The final regulations address the circumstances in which intangible assets (which typi- cally are not considered real property) will be considered real property. An intangible asset will qualify as real property if it derives its value from real property or an interest in real property, is inseparable from the real property or interest therein, or does not produce or contrib- ute to the production of income (e.g., a land lease). The final regulations also con- tain guidance on the topic of the receipt of personal property that is incidental to real prop- erty acquired in an exchange. Taxpayers and practitioners had expressed concern that if items were considered personal property for purposes of the like-kind exchange rules, tax deferral would be lost because non-like-kind items were being exchanged. Under the final regulations, incidental personal property will be disregarded if the personal property typi- cally is transferred with the real property in an ordinary transac- tion and the fair market value of the personal property does not exceed 15% of the total fair market value of the replacement property. Taxpayers should wel- come the addition of this safe harbor. n Conclusion. The final regu- lations are effective as of Dec. 2, 2020, the date published in the Federal Register. However, they can be relied on for exchanges taking place after Dec. 31, 2017. With a Democratic administra- tion coming on board and con- trol of the Senate up in the air, time will tell whether Section 1031 exchanges will be around for the foreseeable future. For now, taxpayers should have a better basis for understanding what is considered real prop- erty. s In general, properties are of like-kind if they have the same nature or characteristics, rather than the same quality or grade.