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GO GREEN
Everyone has ideas about greening residential real estate, but what about commercial investment property going green. Share your experiences or questions…comment here!
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Mandatory Access for Telecommunications Providers?
Mandatory Access to Commercial Property for Telecommunications Providers?
How do the contracts between commercial or multi-family property owners affect Tenants? The FCC is asking for your comments on an issue that could affect who has access to your property.
[Read More...]To Exchange or Not to Exchange…that is the Question!
Whether ‘tis better to sell and pay taxes or by deferring gain to leverage your portfolio?
Section 1031 of the Internal Revenue Code provides that neither gain nor loss is recognized if property held for investment use in trade or business is exchanged for like property. The term “like kind” refers to the grade or quality of the property, not a specific type or class. Thus, single family rentals can be exchanged for a retail strip center, commercial or industrial property.
[Read More...]Exchanging Property You Didn’t Know You Had
Transferable Development Rights for Real Property “Development Rights” is defined as unused rights to develop a property to the extent permitted under state or local law. As states and municipalities have acted to restrict and regulate new construction, the value of development rights has skyrocketed. In recent years, some states and local governments have adopted rules permitting unused development rights to be transferred to another parcel.These development rights can then be used to construct improvements, such as a building with greater floor space or height than would be permitted in the absence of those development rights. Accordingly, an owner of excess development rights may reap a substantial financial windfall by selling the Transferable Development Rights (“TDRs”) to the owner of another parcel who desires to develop the other parcel.
Of course, where there is a potential gain, there is a potential tax and the question arises whether gain resulting from a sale of TDRs can be deferred by exchanging TDRs for a fee interest in real property under Internal Revenue Code Section 1031. More precisely, are TDRs “like-kind” to a fee interest in real property? In PLR 200805012, the Internal Revenue Service (“IRS”) addressed that question squarely. The IRS noted that “[t]he types of property rights and interests that constitute interests in real property . . . for purposes of §1031 are broad” and that “[w]hether property constitutes real or personal property generally is determined under state or local law.” The IRS went on to analyze the two issues commonly addressed in a real property like-kind analysis: (i) the nature of the rights represented by the TDRs (e.g., whether TDRs constitute an interest in real property), and (ii) the duration of the rights obtained under the TDRs.
In determining whether the TDRs constituted an interest in real property, the IRS noted that certain tax statutes in the state in which the TDRs were located treated TDRs as real property. “Although it is unclear whether development rights are treated as interests in real property for all purposes” of state law, it was clear that sections of state’s tax statute and regulations “treat development rights as an interest in real property.” Moreover, a local administrative agency had held that a transfer of development rights was subject to State gains tax as a transfer of real property. The IRS also noted that, similar to a deed, the transfer of development rights was subject to transfer taxes imposed by both the city and state in which the TDRs were located. Accordingly, the IRS found that the TDRs in question constituted an interest in real property under the state’s laws.
The IRS then considered the duration of the rights obtained under the TDRs, because an interest in real property must be of sufficient duration to be considered like-kind to a perpetual fee interest in real property. The IRS found that “various sections of the local ordinances cited by taxpayer provide that development rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. As such, these rights appear to be analogous to perpetual rights.”
As a final matter, the IRS considered whether the taxpayer’s use of the TDRs to benefit a property already owned by the taxpayer presented a problem in the exchange. Citing Revenue Ruling 68-394,1968-2 C.B.338, a case in which a taxpayer acquired a tenant’s leasehold interest on property he already owned as replacement property for certain other property that was condemned, the IRS concluded that “it is not material that the property acquired by the taxpayer as the replacement property is on property already owned by that taxpayer so long as it is acquired in an arm’s length transaction.”
Given the IRS’s analysis above, it would appear that a taxpayer could sell development rights for other like-kind real property just as easily as the taxpayer might purchase development rights as replacement property. (See, e.g., PLR 8141112 in which taxpayer sold agricultural land development rights to State as relinquished property.) Thus, in certain instances, residual development rights should be considered for exchange in the event that the taxpayer does not plan to use them in the future. Of course, any such transaction should be considered only after careful consideration of local laws governing TDRs in the jurisdiction in which the taxpayer owns investment property. A taxpayer may not rely upon a private letter ruling, so caution is warranted and competent tax advice should be obtained in connection with any such transaction.
NEW - The IRC §1031 Tax Handbook
This 550+ page handbook* is a 1031 related legal reference for financial advisors, accountants and attorneys and is available on-line or via CD-ROM. It contains many important Revenue Rulings, Revenue Procedures, Tax Court Decisions, Private Letter Rulings and articles written by our legal staff. Arranged by topic, you can view information quickly on a wide range of §1031 exchange related subjects. This handbook is available in a user-friendly e-magazine format, offering you a fast and simple resource to obtain information on a particular topic within the handbook.
Click here to access our §1031 Tax Handbook: Reference Information for Legal and Tax Advisors
*None of the legal references or editorial materials contained in The IRC §1031 Tax Handbook are intended to be relied upon in a particular case as tax or legal advice. API makes no representation concerning the completeness of the cases, rulings and regulations cited in connection with a particular topic. Resolution of a specific tax question will likely require reference to other more comprehensive and regularly updated legal reference sources.
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