Section 1031 Exchanges and the 20 Percent Business Deduction under IRC Section 199A

Section 199A provides a deduction equal to 20 percent of qualified business income. Only income from a qualified trade or business qualifies for the deduction, and the deduction is subject to limits based upon the w-2 wages paid by the business and the unadjusted basis of property owned by the business. Several issues arise with respect to the section 199A deduction and section 1031. This article addresses three of those issues: (1) the effect year-straddling exchanges have on the unadjusted basis limit; (2) the section 199A unadjusted basis of replacement property; and (3) the extent to which real property ownership is a qualified trade or business under section 199A. Using examples and simple explanations, the article illustrates that taxpayers could lose eligibility for the section 199A deduction based upon the timing of a section 1031 exchange or the type of property they acquire as replacement property