The Tax Cuts and Jobs Act, known as the Act, may have inadvertently impacted professional sports. Among other changes, the Act limits the tax-free treatment of like-kind exchanges to certain real estate transactions. Prior to the Act, Section 1031 permitted businesses to exchange like-kind properties on a tax-deferred basis for federal taxes.
Professional sports teams often utilized 1031 exchange treatment to avoid the current recognition of income on trades of players. Since professional athletes’ contracts are not real property, 1031 treatment will no longer apply to teams trading players after 2017.
According to The Seward and Kissel Tax Group, the impact may include:
• Fewer trades overall,
• Fewer player-for-player trades,
• And more cash-for-player or player-for-draft pick deals.