Development

Category: 1031 Exchange General

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • 1031 Like-Kind Exchange Fallacies

    1031 like-kind exchanges or tax deferred exchanges have been part of the United States tax code since 1921, yet they continue to be the subject of a number of misconceptions, some of which are addressed below.
    Fallacy: 1031 like-kind exchanges are only for the wealthy.
    This misconception arises from the visibility that high-profile companies or individuals have when exchanging an office building or a rental property and deferring the tax on the sale of that asset. What is being missed is that average everyday people are utilizing like-kind exchanges as well.
    An individual who defers tax on selling a small rental property when she buys a replacement property is taking advantage of Section 1031 of the tax code. These sorts of transactions made by small businesses and middle-class investors are frequent, even if they don’t make the headlines.
    I had the opportunity to meet a mechanic recently in Phoenix, Arizona who, upon learning about our company, related his own like-kind exchange story. He had purchased a rental home four years ago for a terrific price, and when the market went up, he was able to enter into a contract to sell it for a profit. He was lucky to have a smart accountant who advised him to structure the transaction as an exchange with a qualified intermediary enabling him to reinvest all of the proceeds in another rental, thereby deferring tax on the sale. He did so and has now profited enough to secure a down payment on three rental properties, about which he remarked, “On a mechanics salary, without 1031s I would never have been able to own three rentals.”
    Fallacy: A 1031 exchange must be simultaneous.
    The most common type of 1031 exchange is a forward exchange, in which the proceeds from the sale of one asset is used to purchase an asset considered to be like-kind within 180 days.
    There are other 1031 exchange deadlines, but the 180-day completion period allows for non-simultaneous exchanges. It is even possible, in a reverse exchange, to purchase replacement property up to 180 days prior to selling the relinquished property.
    Fallacy: The Relinquished Property must be the exact same as the Replacement Property in order to be “like-kind.”
    In real estate, the term “like-kind” is remarkably broad. Most real estate property is considered “like-kind.” Land can exchange into an office building; a rental home can exchange into a Delaware Statutory Trust (DST); a multi-family complex can exchange into twenty rental homes. The list could go on, but the point is that there are many options in real estate when doing an exchange.
    Fallacy: 1031 exchanges are a tax loophole.
    Congress established 1031 like-kind exchanges as part of the Internal Revenue Code in 1921 with two primary purposes:

    To avoid unfair taxation of ongoing investments
    To encourage active reinvestment

    Nearly 100 years later, like-kind exchanges continue to support sales and purchases of real estate and business assets, encourage business expansion, and stimulate economic growth. They are an intentional and integral aspect of United States tax law, not a tax avoidance strategy.
    Conclusion
    Clearing up the misconceptions about what 1031 like-kind exchanges are and how they work continues to be part of Accruit’s mission, since the first step to employing like-kind exchanges is understanding them. If there’s any audience to whom the use of 1031s is limited, it’s the informed.

  • 1031 Like-Kind Exchange Fallacies

    1031 like-kind exchanges or tax deferred exchanges have been part of the United States tax code since 1921, yet they continue to be the subject of a number of misconceptions, some of which are addressed below.
    Fallacy: 1031 like-kind exchanges are only for the wealthy.
    This misconception arises from the visibility that high-profile companies or individuals have when exchanging an office building or a rental property and deferring the tax on the sale of that asset. What is being missed is that average everyday people are utilizing like-kind exchanges as well.
    An individual who defers tax on selling a small rental property when she buys a replacement property is taking advantage of Section 1031 of the tax code. These sorts of transactions made by small businesses and middle-class investors are frequent, even if they don’t make the headlines.
    I had the opportunity to meet a mechanic recently in Phoenix, Arizona who, upon learning about our company, related his own like-kind exchange story. He had purchased a rental home four years ago for a terrific price, and when the market went up, he was able to enter into a contract to sell it for a profit. He was lucky to have a smart accountant who advised him to structure the transaction as an exchange with a qualified intermediary enabling him to reinvest all of the proceeds in another rental, thereby deferring tax on the sale. He did so and has now profited enough to secure a down payment on three rental properties, about which he remarked, “On a mechanics salary, without 1031s I would never have been able to own three rentals.”
    Fallacy: A 1031 exchange must be simultaneous.
    The most common type of 1031 exchange is a forward exchange, in which the proceeds from the sale of one asset is used to purchase an asset considered to be like-kind within 180 days.
    There are other 1031 exchange deadlines, but the 180-day completion period allows for non-simultaneous exchanges. It is even possible, in a reverse exchange, to purchase replacement property up to 180 days prior to selling the relinquished property.
    Fallacy: The Relinquished Property must be the exact same as the Replacement Property in order to be “like-kind.”
    In real estate, the term “like-kind” is remarkably broad. Most real estate property is considered “like-kind.” Land can exchange into an office building; a rental home can exchange into a Delaware Statutory Trust (DST); a multi-family complex can exchange into twenty rental homes. The list could go on, but the point is that there are many options in real estate when doing an exchange.
    Fallacy: 1031 exchanges are a tax loophole.
    Congress established 1031 like-kind exchanges as part of the Internal Revenue Code in 1921 with two primary purposes:

    To avoid unfair taxation of ongoing investments
    To encourage active reinvestment

    Nearly 100 years later, like-kind exchanges continue to support sales and purchases of real estate and business assets, encourage business expansion, and stimulate economic growth. They are an intentional and integral aspect of United States tax law, not a tax avoidance strategy.
    Conclusion
    Clearing up the misconceptions about what 1031 like-kind exchanges are and how they work continues to be part of Accruit’s mission, since the first step to employing like-kind exchanges is understanding them. If there’s any audience to whom the use of 1031s is limited, it’s the informed.

  • 1031 Like-Kind Exchange Fallacies

    1031 like-kind exchanges or tax deferred exchanges have been part of the United States tax code since 1921, yet they continue to be the subject of a number of misconceptions, some of which are addressed below.
    Fallacy: 1031 like-kind exchanges are only for the wealthy.
    This misconception arises from the visibility that high-profile companies or individuals have when exchanging an office building or a rental property and deferring the tax on the sale of that asset. What is being missed is that average everyday people are utilizing like-kind exchanges as well.
    An individual who defers tax on selling a small rental property when she buys a replacement property is taking advantage of Section 1031 of the tax code. These sorts of transactions made by small businesses and middle-class investors are frequent, even if they don’t make the headlines.
    I had the opportunity to meet a mechanic recently in Phoenix, Arizona who, upon learning about our company, related his own like-kind exchange story. He had purchased a rental home four years ago for a terrific price, and when the market went up, he was able to enter into a contract to sell it for a profit. He was lucky to have a smart accountant who advised him to structure the transaction as an exchange with a qualified intermediary enabling him to reinvest all of the proceeds in another rental, thereby deferring tax on the sale. He did so and has now profited enough to secure a down payment on three rental properties, about which he remarked, “On a mechanics salary, without 1031s I would never have been able to own three rentals.”
    Fallacy: A 1031 exchange must be simultaneous.
    The most common type of 1031 exchange is a forward exchange, in which the proceeds from the sale of one asset is used to purchase an asset considered to be like-kind within 180 days.
    There are other 1031 exchange deadlines, but the 180-day completion period allows for non-simultaneous exchanges. It is even possible, in a reverse exchange, to purchase replacement property up to 180 days prior to selling the relinquished property.
    Fallacy: The Relinquished Property must be the exact same as the Replacement Property in order to be “like-kind.”
    In real estate, the term “like-kind” is remarkably broad. Most real estate property is considered “like-kind.” Land can exchange into an office building; a rental home can exchange into a Delaware Statutory Trust (DST); a multi-family complex can exchange into twenty rental homes. The list could go on, but the point is that there are many options in real estate when doing an exchange.
    Fallacy: 1031 exchanges are a tax loophole.
    Congress established 1031 like-kind exchanges as part of the Internal Revenue Code in 1921 with two primary purposes:

    To avoid unfair taxation of ongoing investments
    To encourage active reinvestment

    Nearly 100 years later, like-kind exchanges continue to support sales and purchases of real estate and business assets, encourage business expansion, and stimulate economic growth. They are an intentional and integral aspect of United States tax law, not a tax avoidance strategy.
    Conclusion
    Clearing up the misconceptions about what 1031 like-kind exchanges are and how they work continues to be part of Accruit’s mission, since the first step to employing like-kind exchanges is understanding them. If there’s any audience to whom the use of 1031s is limited, it’s the informed.

  • Fractional Ownership of Real Estate

    There are many benefits to owning real estate – appreciation, diversification, mortgage interest deduction, and 1031 tax deferment are a few. However, not everyone has the capital to purchase high-end properties like a Donald Trump. Because of the high cost of real estate, many investors seek out angel funding and bank loans to make up their capital shortfalls. Yet, there is another way for an investor to own real estate, and that is fractional ownership. Fractional ownership is an investment structure that allows multiple investors to purchase a percentage ownership in an investment-grade asset.
    Benefits of Fractional Ownership of Real Estate
    Diversification
    Fractional ownership, formerly the province of the savvy mogul who has built a career owning, operating, leasing, and selling real estate, has attracted individual investors who seek an alternative investment to stocks, bonds, and mutual funds they may already own. Fractional real estate ownership and other alternative investments provide for diversification, and financial advisors will often dedicate 10% of a clients’ portfolio towards such vehicles.
    The 3 T’s of Real Estate
    Fractional ownership can be very attractive to real estate investors who wish to unburden themselves of real estate’s 3 T’s (tenants, toilets, and trash). The day-to-day realities of owning real estate – grounds maintenance, property up-keep, and leasing – are not an issue for fractional owners. Investors can enjoy all the benefits of a solid return while not laboring over the 3 T’s.
    Options for Fractional Ownership of Real Estate
    In the United States, there are two primary options for those interested in fractional real estate ownership:  Delaware Statutory Trust (DST) and Tenant-In-Common (TIC) ownership. Each option has become increasingly popular as an alternative investment over the past decade because each affords opportunities for individual investors to own investment-grade property – commercial real estate with more income-generating potential than smaller residential property.
    Tenant-in-Common (TICs)
    Tenant-in-common (TIC) is an investment property structure that was established during the 1990s and has grown in popularity since. Think of a TIC as a form of shared tenure rights to properties owned.  Tenants-in-common each own a separate interest in the same real property. The advantages of a TIC are that each tenant-in-common has stronger buying power and fewer costs, and that each shares responsibilities for a property that is owned by the partnership. 
    Delaware Statutory Trusts (DSTs)
    DSTs are legal entities created as trusts within the state of Delaware in which each investor owns a “beneficial interest” in the DST. DSTs have gained popularity over the last few years due to the ability to secure financing and attract more investors with lower minimum investment thresholds. Another advantage of a DST is that a lender underwrites a single borrower, as opposed to the multiple borrowers within the TIC structure. Furthermore, there is no stated IRS limit to the number of investors a DST may have, versus the 35 maximum of the TIC.  Consequently, larger properties may be purchased while keeping the minimum investment size to around $100,000.  Finally, DSTs do not allow for any input from beneficial interest owners, unlike TICs, which need to get unanimous approval from all TIC members.
    Jokingly, a wise man once told me that a DST is the “Arnold Schwarzenegger version of a TIC.”
    Conclusion
    DSTs and TICs afford individual investors entry into large commercial property, either through a cash investment (typically $100,000 and up) or a 1031 exchange of real assets. Before investing in a DST or TIC, be certain to research the property and the company sponsoring the DST or TIC, and engage a qualified intermediary for your like-kind exchange.