The law changed a corner of the tax code that mostly applies to farmers, manufacturers and other businesses that until recently could swap certain assets like trucks and machinery tax-free. But by adding a single word to the newly written tax code — “real” — the law now only allows real estate swaps to qualify for that special treatment.
That change is meant to capture more federal revenue, in order to partially offset reductions in business and personal income tax rates. It forces manufacturers, farmers and others to pay more in capital gains taxes, if they trade an asset for something more valuable. The
Joint Committee on Taxation estimates the change will raise $31 billion over the next decade.
It also means that the Astros and other sports franchises could now face capital gains taxes every time they exchange or trade their highly paid players.
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The confusion is only one of many side effects of the new tax law, which sped through the House and Senate in less than two months at the end of last year, resulting in a series of changes that were both intentional and inadvertent. Republicans say they weren’t trying to hamstring sports teams: The change in the like-kind provision, Senate staff members said, was simply an attempt to broaden the United States tax base.
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I.R.S. officials declined to comment on whether the agency would issue future rulings on the tax treatment of sports trades. Treasury officials did not respond to a request for comment on Friday.
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For decades, teams have not paid taxes on such trades, and thus have not had to account for the value of the assets they are exchanging, for tax purposes.
A 1967 ruling from the Internal Revenue Service allowed baseball owners to depreciate the cost of player contracts over several years, thus reducing the team’s taxable income. It declared that “trades of player contracts owned by major league baseball clubs will be considered exchanges of like-kind property” under a section of the tax code.
That distinction was crucial. Until this year, the “like-kind” provision allowed owners of similar types of property, such as machinery or fleet vehicles, to swap their assets without paying taxes on either party’s gains until the asset was sold. In a baseball or basketball trade, the assets aren’t players, they are the players’ contracts — and the I.R.S. was allowing them to be exchanged without fear of taxation.
The new law breaks that peace, by limiting like-kind exchanges to “real property,” which is shorthand for land or other real estate.
