Baseball and Tax Law - 1031 Exchanges
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A hot topic for avid baseball fans in the weeks preceding the 2018 season surprisingly involved an arcane tax procedure and President Donald Trump. In 2017, Congress passed the Tax Cuts and Jobs Act which slashed corporate and individual tax rates across the board.
It also amended section 1031 of the tax code, which pertains to exchanges of property and the tax implications of doing so.
A 1031 Exchange is a transaction where a party selling property for a profit exchanges that property for “like-kind” property and is allowed to defer the capital gains taxes involved in the transaction.
For instance, if you purchased a house and then sold that house at a profit, you could potentially buy a new, more expensive house, and not have to pay taxes on the gain from the previous house until a later date.
In the past, this process was used in a variety of situations.
Art collectors might use a 1031 exchange to defer the taxes on a painting they sold for a profit. This deferment of taxes did not sit well with Congress, and by changing this section of the tax code, they hoped to capture more tax revenue.
Keep It “Real”
As shown in the margin, the new law adds the word “real" to section 1031(a)(1). This means that from now on, the 1031 Exchange can only be used in connection with real estate. What could this possibly have to do with Major League Baseball?
Apparently, since 1967 the IRS has considered trades of baseball player contracts as exchanges of like-kind property. In other words, MLB teams have been using the 1031 Exchange to conduct their player trades and defer capital gains taxes.
While the implications are far from certain, several pundits, sports analysts, and lawyers have predicted that the uncertainty now created by the new tax code will force Major League teams to reevaluate their player valuations and potentially chill the trade market this season.
Whatever the outcome is, be on the lookout for executives from leagues like MLB to pay a few visits to Congress in an effort to lobby for favorable rule interpretations.
“My legal training taught me to put myself in our opponents' dugout. Law school taught me how to analyze and how to best deal with a specific situation…The best degree a baseball manager can get is a J.D. The law degree taught me how to study, how to think, and how to implement and develop a strategy.”
- Tony La Russa
Hall of Fame Manager