Tag: Like-kind Exchanges

Tax Proposals Under Scrutiny as Timetable Moves Up for Mammoth Reconciliation Bill

Posted on by Trey Jackson

The unanticipated commitment by Speaker Pelosi to allow a stand-alone vote on the bipartisan Senate infrastructure bill no later than September 27 has scrambled the Congressional calendar and put increased attention and focus on the potential for major tax changes.

Why It Matters

  • House Leaders are urging committees, including the powerful Ways and Means Committee, to complete their work on the $3.5 trillion budget reconciliation bill by September 15.  Ways and Means Chairman Richie Neal has indicated a formal mark-up could start the week of Sept. 6 and continue 4-5 days.  (E&E Daily, Aug. 25)
  • Accelerating the consideration of the $3.5 trillion reconciliation bill may allow its supporters and advocates to retain political momentum for the massive package of social safety net, environmental, tax, and other policies—momentum that could be lost once the infrastructure bill is sent to the President.
  • The shortened timetable, however, puts pressure on lawmakers who are considering complex changes to the tax code that would normally require hearings, extended debate, and substantial vetting.  

Industry Concerns

  • The Real Estate Roundtable has raised concerns regarding a number of proposals in the President’s plan that would raise the tax burden on capital formation, undermine property values and the functioning of real estate markets, and harm the industry’s ability to create jobs and support local communities through property tax revenue.  These proposals include restrictions on like-kind exchanges, an elimination of the reduced tax rate on capital gains, and the taxation of unrealized gains at death.
  • On Tuesday, the accounting industry expressed strong concerns with the President’s proposed changes to capital income. The letter noted that, “[t]he taxation of the capital gains on gift or death in many cases would be the third time that the gain is taxed.”  Imposing immediate tax on transfers by gift or death is an unreasonable requirement when the transfers are non-liquid assets such as real estate, business interests, etc., because it may require the forced liquidation of some or all of the assets transferred,” they continued.    
  • Last Friday, the Tax Foundation challenged the Administration’s claim that their tax proposals would spare 97 percent of small businesses.  The organization analyzed the most recent IRS data and concluded the President’s proposals would reach more than half of pass-through business income (because 54% of pass-through income is earned by taxpayers making more than $500,000).
  • At the same time, lawmakers are mobilizing to ensure that the $3.5 trillion bill includes priorities such as increased investment in affordable housing.  On Thursday, 111 House Democrats led by Reps. Suzan DelBene (D-WA) and Don Beyer (D-VA) wrote to Speaker Pelosi urging that the legislation include a significant expansion of the low-income housing tax credit.

Contact Congress

Congressional Briefing on Section 1031 Exchanges; ‘Stand with Cities’ Event Focuses on Economic Growth

Posted on by Trey Jackson

A broad business coalition that includes The Real Estate Roundtable held a virtual briefing this week on the economic importance of like-kind exchanges (LKEs) for members of Congress and their staff. Additionally, several Roundtable members focused on the future of urban areas and economic growth during a “Stand With Cities” webcast.

  • The May 27 briefing focused on the longstanding, positive role of like-kind exchanges in the economy and the potential negative unintended consequences of limiting section 1031. (View video of the briefing)
  • DeBoer said that as Washington policymakers consider whether and how to pay for infrastructure, clean energy, education, child care, housing and other policy goals,  various tax provisions are under consideration, including the Section 1031 exchanges. He also noted how LKEs have been used to finance economic development and support local communities for 100 years – the provision is nearly as old as the income tax itself. (Exeter, history of Section 1031)

LKE Examples & Data

  • Nadji described the practical uses of LKEs, which help small business, partnerships and family farms to reinvest profits—in this case, the capital gain earned in a real estate business or investment—on a tax-deferred basis so that a business can continue to grow. He noted that if the exchanges are restricted, it would stifle transactions and hamper the marketplace.
  • Mayor Chirico gave real-world examples of how like-kind exchanges have provided an essential tool for attracting economic investment to his community. He stated that because of 1031, Naperville was able to secure a Costco store, which has produced jobs and as much sales tax revenue as their entire downtown business district. “The halo effect of all the Mom and Pop businesses that have now occupied vacant spaces in that very worn-out and distressed area that we once had – it has now been transformed, and it happened during the pandemic,” Chirico said.
  • Professor Petrova addressed her extensive research into the macro-economic impact of LKEs with Dr. David Ling. In their recent study, “The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate,” data shows how LKEs have helped preserve capital, allowed investors to upgrade their portfolios and make capital improvements.
  • Petrova’s research also demonstrates how elimination of LKEs would likely lead to a decrease in CRE prices, less investment in real estate, greater use of leverage and a decrease in liquidity.
  • Dr. Carroll discussed his recent study on the “ Economic contribution of the like-kind exchange rules to the US economy in 2021.” His key results focused on the positive economic activity supported by LKEs; employment supported by the exchanges, listed by industry; and taxes paid by and related to businesses that make use of Section 1031.

Stand With Cities

Like-Kind exchanges and economic growth proposals under consideration by Washington policymakers will be a focus of discussion during The Roundtable’s June 15-16 Annual Business Meeting and Policy Advisory Committees Meetings (all remote).

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Real Estate Coalition Weighs In on Infrastructure Funding Options; Roundtable Addresses Tax Proposals and Like-Kind Exchanges

Posted on by Trey Jackson

The Real Estate Roundtable, along with 16 other national real estate trade organizations, submitted detailed comments to the Senate Finance Committee and House Ways and Means Committee, which held hearings this week on how to fund recent Biden Administration  infrastructure investment proposals.

Congressional Consideration

  • The coalition letter states, “As Congress considers options to pay for these investments, we urge policymakers not to erode longstanding tax rules that support job creation, capital formation and productive risk taking. Several of the tax proposals in the Administration’s infrastructure and human capital initiatives, unfortunately, would reduce real estate investment and diminish opportunities for startup businesses and those less advantaged.”
  • The comments focus on recent Biden Administration tax proposals, including:
    • Limiting taxpayers’ ability to defer gain that is reinvested in property of a like-kind;
    • Nearly doubling the tax rate on long-term capital gains;
    • Limiting capital gains treatment to invested cash and disregarding other forms of risk taken by partners; and
    • Making death a taxable event at far lower levels of income and potentially taxing the unrealized gain on appreciated assets not once but twice when an individual dies. 

Economic Impact 

Dramatic sunset over the US capitol in Washington DC
  • The letter states, “(President Biden’s) American Jobs Plan and American Families Plan offer credible initiatives to address many of our Nation’s most pressing needs, such as a modernized infrastructure, a more comprehensive approach to climate-related matters, and increased investments in housing, education, and childcare. We support aggressive steps to finance infrastructure needs, increase the supply of affordable housing, expand the economy, and promote job growth. Regrettably, some of the tax proposals accompanying the plans would reduce economic activity and opportunities and be completely counterproductive to the goals of the President’s initiatives.”
  • The coalition comments detail how the Biden tax proposals would undercut the tax base in localities throughout the country that rely on real estate taxes to finance schools, police, and other first responders. It also notes how the proposed taxes would diminish the incentive for private investment of capital in riskier real estate projects, such as affordable housing and redevelopment in struggling communities.
  • The letter also cites an April 2021 EY study commissioned by the Family Business Estate Tax Coalition, which includes The Real Estate Roundtable, that shows the impact of a specific proposal that would impose tax on transferred assets at death. The study found that repealing stepped-up basis and taxing unrealized gains at death would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year. 

Tax Issues & LKEs 

  • Among the other industry leaders scheduled to participate in the May 25 event are the following Real Estate Roundtable Members:
  • A list of all participants is on the event website.
  • DeBoer was also quoted in Commercial Observer on May 18 on President Biden’s proposal to limit the use of Section 1031 like-kind exchanges. “Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority-, women- and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer stated. 

President Biden’s proposals, congressional action and the industry response will be a focus of discussion at The Roundtable’s June 15 Annual Meeting and its Tax Policy Advisory Committee (TPAC) Meeting on June 16.

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Broad Coalition Highlights Economic, Social, and Environmental Benefits of Like-Kind Exchanges

Posted on by Trey Jackson

The Real Estate Roundtable, along with 30 other national real estate, housing, environmental, farming, ranching, forestry, and financial services-related organizations, wrote to key policymakers on March 16 to underscore the vital importance of real estate like-kind exchanges.

The letters to Treasury Secretary Yellen and the chairmen and ranking members of the congressional tax-writing committees underscore the many benefits of like-kind exchanges to the U.S. economy and the health of real estate markets. The letters also show how the exchanges improve the supply of housing, retirement security, environmental conservation and the preservation of family-owned farms and ranches. 

Why It Matters

  • Between 10-20 percent of all commercial real estate transactions involve a like-kind exchange.  The coalition letters describes how like-kind exchanges under section 1031 of the tax code helped stabilize property markets at the height of the COVID-19 lockdown, and will continue to facilitate repurposing of real estate assets in the post-COVID economy.
  • The letters provide supporting data showing how like-kind exchanges allow businesses to grow by reinvesting gains on a tax-deferred basis in new and productive assets. 
  • Like-kind exchanges create a ladder of economic opportunity for minority-, veteran-, and women-owned businesses and cash-poor entrepreneurs that may lack access to traditional sources of financing, according to research referenced in the letters.

Groundbreaking Research:

  • The letters highlight original research by Professors David Ling (Univ. Fla.) and Milena Petrova (Syracuse U.) on the economic impact of like-kind exchanges.  The study commissioned by The Real Estate Roundtable and other organizations was published in two installments in the peer-reviewed Journal of Real Estate Literature here and here and more recently updated with current data.

  • The academic studies have found that exchanges spur capital expenditures, increase investment, create jobs for skilled tradesmen and others, reduce unnecessary economic risk, lower rents, support property values, and generate substantial state and local tax revenue.
  • Roughly 40 percent of like-kind exchanges involve rental housing.  The coalition emphasized in its letter that section 1031 is an important source of capital for affordable and workforce housing. Farmers and ranchers use like-kind exchanges to combine acreage, acquire higher-grade land, mitigate environmental impacts, and otherwise improve operations.  Land conservation organizations rely on exchanges to preserve open spaces for public use or environmental protection.

The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue working to raise awareness of the role that like-kind exchanges play in supporting the health and stability of U.S. real estate and real estate markets. 

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Business Coalition Urges Senate to Pass Corporate Diversity Legislation

Posted on by Trey Jackson

The Real Estate Roundtable and 16 other national organizations sent a letter on July 27 urging leaders of the Senate Banking Committee to advance legislation that would require public companies to report the racial, ethnic and gender composition of their boards and executive officers. (The Hill and coalition letter, July 27)

  • The act would require issuers that must register under the Securities Exchange Act of 1934 to provide data regarding diversity on corporate boards and in executive management. Such diversity reporting would occur in annual reports and proxy statements regarding election of directors filed with the Securities and Exchange Commission (SEC).
  • The bill would also require securities issuers to disclose whether it has adopted a plan or strategy to promote board- and executive-level racial, ethnic, gender, and veteran-status diversity.
  • The coalition letter addressed to the Senate Committee’s Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH), cites a 2019 PwC Annual Corporate Directors Survey to show the benefits of diversity.  The survey results show that 94% of participating board directors indicated that a diverse board brings unique perspectives; 87% responded that diversity enhances board performance; and 84% responded that it improves relationships with investors.
  • Presumptive Democratic Presidential Nominee Joe Biden this week presented a series of proposals intended to address racial economic inequality. Biden said that as president, his future appointments to the Federal Reserve would be “diverse nominees for the Board of Governors and the regional Federal Reserve Banks.” (The Wall Street Journal, and The New York Times, July 29)
  • Last week the Biden campaign indicated its desire to eliminate several current law tax provisions, including like-kind exchanges under Section 1031, to pay for a 10-year, $775 billion “caregivers” proposal.

Roundtable President and CEO Jeffrey DeBoer responded, “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds.”  (Entire Roundtable Statement on like-kind exchanges, July 21 and Roundtable Weekly, July 24).

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Biden Proposes Taxes on Real Estate Investments and 1031 Like-Kind Exchanges to Pay for Caregiving Plan

Posted on by Trey Jackson

Presumptive Democratic nominee Joe Biden on July 21 released a policy proposal to fund universal childcare and in-home elder care by taxing real estate investors and targeting the taxation of like-kind exchanges.  (The Real Deal July 21)

  • The proposal states that $775 billion would be raised over 10 years to pay for the plan “… by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000 and taking steps to increase tax compliance for high-income earners.” 
  •  A senior Biden campaign official added the plan would prevent investors from using real estate losses to lower their income tax bills and would take aim at the taxation of like-kind exchanges, according to a Bloomberg report. 
  • Real Estate Roundtable President and CEO Jeffrey DeBoer responded by noting the many ways in which like-kind exchanges contribute to economic growth and create greater opportunity for entrepreneurs from under-represented demographic groups.
  • “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement.  Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer said.
  • He added, “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain. In short, like-kind exchanges create a more dynamic real estate marketplace, ensuring properties do not languish, permanently underutilized and under-invested. Congressional review of like-kind exchanges is reasonable and appropriate, and we will support sensible reforms, as The Roundtable has in the past, that preserve and maintain the provision’s broad-based economic benefits.”  (National Real Estate Investor, July 21)
  • “The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce” does not contain details on the specific changes to like-kind exchange (LKE) taxation.  (CNBC, July 21)

A 2015 economic study commissioned by The Real Estate Roundtable and other national real estate organizations on the US commercial real estate market highlights the critical role that 1031 exchanges play in stabilizing rents, safeguarding  property values and strengthening the economy.   (“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” by Professors David C. Ling and Milena Petrova)  

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Real Estate Roundtable Statement on Biden Like-Kind Exchange Proposal

Posted on by Trey Jackson

Presumptive Democratic nominee Joe Biden on July 21, 2020 released a policy proposal to fund universal childcare and in-home elder care by taxing real estate investors and targeting the taxation of like-kind exchanges.  Real Estate Roundtable President and CEO Jeffrey DeBoer responded by noting the many ways in which like-kind exchanges contribute to economic growth and create greater opportunity for entrepreneurs from under-represented demographic groups.

  • “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement.  Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer said.
  • He added, “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain. In short, like-kind exchanges create a more dynamic real estate marketplace, ensuring properties do not languish, permanently underutilized and under-invested. Congressional review of like-kind exchanges is reasonable and appropriate, and we will support sensible reforms, as The Roundtable has in the past, that preserve and maintain the provision’s broad-based economic benefits.” 

A 2015 economic study commissioned by The Real Estate Roundtable and other national real estate organizations on the US commercial real estate market highlights the critical role that 1031 exchanges play in stabilizing rents, safeguarding  property values and strengthening the economy.   (“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” by Professors David C. Ling and Milena Petrova)

IRS Proposes Favorable New Rules for Like-Kind Exchanges

Posted on by Trey Jackson
IRS building in Washington DC

The IRS on June 11 released proposed regulations for like-kind exchanges under section 1031 that implement changes enacted in the Tax Cuts and Jobs Act (TCJA) of 2017.  TCJA restricted section 1031 to exchanges of “real property.”  The proposed rules would provide a favorable definition of “real property” and establish a safe harbor for certain personal property received in an exchange. 

  • Like-kind exchange rules allow taxpayers to defer capital gains tax when they exchange property held for investment or business use for another property of a “like kind.”  
  • Ryan McCormick, senior vice president and counsel at The Real Estate Roundtable, described in Bloomberg  Tax (June 11) why real estate like-kind exchanges are critical in the current environment: “Like-kind exchanges are even more important during periods of economic stress, like today, when traditional financing is less reliable.”
  • TPAC Member Richard Lipton (Baker McKenzie LLP) noted favorable aspects of the proposed rules, “It’s a very broad definition and many practitioners will be happy with the inclusion of inherently permanent structures being broadly defined, and also the inclusion of certain intangible property,” Lipton said.  (Bloomberg Tax, June 11).
  • Under TCJA, items like machinery, equipment, vehicles, artwork, collectibles, and patents no longer qualify for deferral under section 1031, but exchange treatment remains available for real property, including “land and generally anything built on or attached to it.” (IRS New Release 2018-227, Nov. 19, 2018).

The proposed rules appropriately treat licenses, permits, and other rights that derive their value from real property as eligible assets.  The regulations also provide a helpful safe harbor for incidental personal property (up to 15% of the aggregate value of the replacement property) that is typically transferred, in standard commercial transactions, with the real property.  (Federal Register, June 12, Statutory Limitations on Like-Kind Exchanges)

Like-Kind Exchange Deadlines

Like-kind exchanges must meet strict deadlines to qualify for deferral.  The pandemic has greatly complicated the ability to complete an exchange.  The reasons include: stay-at-home orders, flight restrictions, an inability to visit sites or perform appraisals, the closure of local governmental offices, and a general inability to conduct the necessary due diligence. 

  • In March, The Roundtable and other real estate organizations requested an extension of 1031 deadlines.  (Coalition LKE letter, March 23)
  • The Treasury Department in early April extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020.  (IRS Notice 2020-23)
  • “It seemed like a good-government, reasonable thing to do,” The Roundtable’s Ryan McCormick recently told The New York Times.  Real estate investors could not travel because of pandemic lockdowns and completing due diligence steps such as an appraisal became difficult, if not impossible. “Taxpayers were seeking some additional time to work through that,” McCormick told the Times.  (The New York Times, June 5)
  • An industry coalition, including The Real Estate Roundtable, on April 20 wrote to the Treasury Secretary seeking further clarification and relief on 1031 deadlines.  (Coalition letter, April 20, 2020)

The Roundtable’s TPAC will review the June 11 proposed regulations and comment on any further like-kind exchange issues that may need clarification. 

TPAC Video Discussions

TPAC held its first remote meeting in conjunction with The Roundtable’s Annual Meeting on June 12.  Wide-ranging TPAC discussions touch on recent social unrest; the COVID-19 pandemic and the CARES Act; partnership audit reform;  section 199A;  like-kind exchanges, COD income; energy-efficiency incentives; REIT related party rules; section 163(j); and much more. TPAC recordings on The Roundtable’s YouTube channel include:

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Roundtable Video Alert Focuses on Tax Policy Pandemic Responses and Priorities; Industry Asks Treasury to Clarify Like-Kind Exchange Deadlines

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday released a video alert focused on tax policy efforts aimed at mitigating the COVID-19 pandemic’s economic impact on commercial real estate.  

  • Roundtable President and CEO Jeffrey DeBoer, above, introduces the video with a report on the organization’s various policy efforts related to emergency financing, including the Payroll Protection Program (PPP) and the Federal Reserve’s credit lending facilities, such as the Term Asset-Backed Securities Loan Facility (TALF) – before delving into tax policy with Roundtable Senior Vice President and Counsel Ryan McCormick.
  • McCormick describes recent actions the Treasury Department and the Internal Revenue Service have taken to provide relief and ease cash flow challenges for taxpayers, including real estate businesses and their tenants, and shares insight on remaining COVID-19-related tax priorities.
  • The discussion highlights new Treasury guidance permitting partnerships to file amended tax returns, thus allowing partnerships to benefit from retroactive provisions in the CARES Act, including the shorter depreciation period for improvements to nonresidential property.  Other issues include new guidance allowing real estate businesses to revoke prior elections under the business interest limitation.  The Roundtable had urged both actions to ensure that the tax relief in the CARES fully extends to commercial real estate and its tenants.  (Roundtable Weekly, April 10)
  • The video alert also addresses the administrative relief related to tax deadlines for like-kind exchange transactions and opportunity zone investments – along with added flexibility for mortgage servicers’ to modify loans in mortgage-backed securities (REMICs) without triggering tax liability. 
  • Remaining tax policy priorities for The Roundtable include relief that would allow private parties to restructure existing loans through debt workouts and restructurings without generating cancellation of indebtedness (COD) income – (see Roundtable COD letter, March 20) – as well as greater flexibility under the tax law for REITs to take an economic interest in a struggling commercial tenant to help avoid business closures and layoffs.”  
  • This week’s video discussion is the third of several Roundtable video reports addressing the COVID-19 economic crisis.  Other resources, including related policy comment letters, are available on the organization’s website.  (The Roundtable’s COVID-19 Resource Center).   

Like-Kind Exchange Deadline Clarification

An industry coalition, including The Real Estate Roundtable, on April 20 wrote to Treasury Secretary Steven Mnuchin seeking further clarification and relief on deadlines affecting real estate like-kind exchanges.  (LKE policy comment letter, April 20)

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.
  • At a minimum, Notice 2020-23 extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.
  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.
  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.
  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

Additional guidance from Treasury or the IRS on like-kind exchange transactions is expected in the coming days.

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