Internal Revenue Code Section 1031
Internal Revenue Code (IRC) Section 1031, which pertains to tax deferral for like-kind exchanges of assets, has been a mainstay of the tax code since 1921. Originally is was thought that exchanges had to be simultaneous and that the taxpayer had to give up the existing property, the “relinquished property,” and receive the new “replacement property” from the buyer of the relinquished property. The landmark legal decision in Starker v. U.S. held that exchanges did not have to be simultaneous and Internal Revenue Service Regulations: IRC§1031 published in 1991 provided a technique whereby the taxpayer did not have to receive the replacement property from the buyer. In fact, neither the taxpayer’s buyer nor seller need to provide their cooperation in order for the taxpayer to execute an exchange.
What assets are like-kind to one another?
Determining that assets are like-kind is generally more broad when dealing with real estate than when dealing with personal property. A regular owning of real estate is known as a fee interest. Any type of real estate is like-kind to any other type of real estate. So a parcel of vacant land held for investment would be like-kind to a commercial building, a condominium held for rent is like-kind to an industrial building, and so on.
Some non-traditional asset holdings have also been found to be like-kind to a real estate fee interest such as options, timber and water rights, installment sale agreements, oil and gas rights, co-ops, improvements made upon real estate, and lessee’s interests under long term leases and easements.
Is a landowner’s income stream from a cell phone tower lease exchangeable?
A lessee’s interest in a long term lease (30 or more years) including options has been considered like-kind to real estate for a long time. The same cannot be said about a property owner’s interest, as lessor, in a lease or long term lease. The value of an ongoing stream of income from a lease, including a cell phone tower lease, is considered rent and not a real estate interest. However, a private letter ruling (PLR 201149003) put out by the IRS in 2011 suggested a way to effectively convert that stream of income to an interest in real estate that would become like-kind to any other fee interest in real estate.
How may cell towers be included in a 1031 exchange?
As noted above, there is a lot of authority that easements are like-kind to real estate. Under the PLR, if a cell tower is part of a permanent easement and the value of the easement is based upon the value of the cell tower lease, then a sale of the easement can be exchanged for other fee interests in real estate. Even if the cell phone tower is not located on an easement, the taxpayer may create the easement prior to the sale of the cell tower and effectively sell the cell tower by selling that easement.
Easements generally can be of a limited term or a perpetual term. The private letter ruling referred to above was based upon a perpetual term easement. Easements can be used for various purposes, such as granting access to property or granting possessory rights in property. It is possible that the IRS would look at the nature of a particular easement to determine whether, if it were long term, it would be like-kind to a fee interest in real estate. It may be that a possessory-type, long-term easement would receive the same tax treatment as a permanent easement, but this was not dealt with in the PLR (See also