<p>Once the basics of 1031 exchange are understood, there are still a lot of questions that the Accruit team fields on a regular basis. Join Senior Director Brendan Lewis and Managing Director Martin Edwards as they provide answers to the most commonly asked questions about 1031 exchanges.&nbsp;</p>
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<p>Sales of cell towers or billboards are quite common. The sale may be from one taxpayer to another or to a company who is in the business of aggregating these assets for its own business of acquiring, owning, and leasing such assets. The value of the cell tower or billboard is largely a function of the value of the lease, i.e. the rent, term, and strength of the lessee. Oftentimes the sale prices can be considerable, which in turn, may cause a significant tax event to the seller. In many instances, the availability of a tax deferred exchange under Section 1031 of the Internal Revenue&nbsp;Code can be the key to enabling a sale to take place.</p>

<h2>Use of Easement for Sale</h2>

<p>As many people know, <a href="https://www.accruit.com/blog/understanding-like-kind-requirement-1031-e…; target="_blank">1031 exchanges must involve like-kind property sold and purchased</a>. This means an interest in real estate must be exchanged for another interest in real estate. In the case of a cell tower or billboard sale, the key is structuring it so that the disposition of the asset is considered the sale of real estate. A sale of a lessor’s interest in a lease does not constitute a real estate interest. However, a real estate sale can be accomplished by creating, or transferring an existing easement, on which the cell tower or billboard is situated. There is substantial case law providing that easements generally are a real property interest. <a href="https://www.irs.gov/pub/irs-wd/1149003.pdf&quot; target="_blank">One particular Private Letter Ruling</a> provides validation of such a structure for the exchange of a cell tower easement. Although a Private Letter Ruling is “private” and can only be relied on by the recipient, the IRS does publish them to let the public know its position on the subject of the ruling.</p>

<h2>Facts of the Private Letter Ruling</h2>

<p>Facts of the PLR included a proposed “exclusive easement” for the site of the cell phone tower and “non-exclusive easements” for road access to the tower, maintenance, and access to the rooftop. transfer of the easement also included an assignment of the lease from the taxpayer to the easement owner. PLR references that most easements are perpetual unless the easement owner abandons the site for a number or years. It also states that a small number of easements are long term but not perpetual in duration.</p>

<p>This PLR provides a roadmap to structing an easement sale which includes the transfer of the lease of the cell tower or billboard located on the easement. It is important to note that the ruling references perpetual and long-term easements. That raises the question whether any cell tower or billboard sale requires a perpetual easement. In the PLR, the easement was to cease if the easement owner abandoned the property. That would seem to affect its otherwise perpetual nature. In addition, in the Analysis section of the PLR, the Service specifically noted that the “Taxpayer will acquire, own and lease perpetual and <em>long-term</em> easements…” [emphasis added]. In the Conclusion section of the PLR the Service states that “an easement acquired by Taxpayer under and Easement Agreement is an “interest in real property” that qualifies, under § 856(c)(5(B), as a real estate asset…”. There is no reference in the conclusion indicating that the long-term easement would be treated differently than a permanent easement.</p>

<p>Also, it should be noted that the taxpayer in the PLR was a REIT and there are some small differences between the Code section real estate definition for REITs and 1031, however those differences are not material for the treatment of the easements.</p>

<h2>No Inference from Treatment of Lessee’s Interest in a Long Term Lease</h2>

<p>People tend to equate the necessary easement term with the well know fact that a lessee’s interest in a lease with more than 30 years to run (including renewal options) is like kind to conventional real estate. Unfortunately, that is not particularly relevant to the issues above. In connection with the cell tower or billboard easement, it is the landowner’s interest in the easement that is being sold and the lessor’s interest in the lease being assigned. That is quite different than a lessee’s interest in a lease.</p>

<h2>Summary</h2>

<p>There is an active market in the sale of cell towers and billboards. Similar assets such as wind farms, solar arrays, turbines, roof top antennas, and fiber optic cable should be capable of being exchanged in the same manner as cell tower and billboard easements. While some of these assets are valued based upon the value of the lease associated with the asset, an owner’s interest in a lease cannot be the subject of a 1031 exchange. PLR 1149003 provides some guidance on how to structure the transfer of the lease value by selling the easement under the leased asset. To maximize the validity of the easement, it would be best if the easement were perpetual in nature. However, it may be possible to do the exchange that is long term in nature. As always, it is always advisable to consult with professional tax or legal advisors before proceeding with such a transaction.</p>

<p>As many have reported, Presidential candidate Joe Biden announced on Tuesday, July 21^st that he plans to raise cash for childcare and elderly services by revamping the rules for 1031 exchanges of real property to limit the tax deferral opportunity to taxpayers with annual incomes of less than $400,000 per year. Targeting 1031 exchanges such as what Biden proposes is not new. Various administrations of both parties have attempted for years to limit the extent of 1031 exchanges or repeal the provision to raise revenue for other programs. Ultimately those attempts have failed when, upon further consideration, they realized that they would have essentially jettisoned a tax provision that is not a “loophole” but was made a part of the Internal Revenue Code in 1921 because it embodied good tax policy and directly influenced economic growth. There were sound reasons this concept was put into the Tax Code nearly 100 years ago. Those policy considerations are true now more than ever.</p>

<h2>Why 1031 exchanges are important</h2>

<p>The reasons for Section 1031 exchanges have become even more important in the tough economic times created by the current pandemic. Repeal or limitation of 1031 exchanges would only run counter to our shared goal of pulling the Country out of current economic doldrums. The <a href="https://www.1031taxreform.com/ling-petrova/">empirical data amassed</a> by diverse groups in the real estate industry is overwhelming that real estate transactions and specifically the ability to defer capital gains by reinvesting in business use or investment property is one of the <a href="http://strongest economic drivers">strongest economic drivers</a> in our country.&nbsp;The temptation to use the dramatic limitation of Section 1031 is shortsighted when viewed in the context of the effect on many other persons, industries and taxing entities that benefit from the frequent transfer of real estate ownership.</p>

<h2>1031 exchange impacts Main Street America</h2>

<p>In addition, contrary to the often used refrain that rich persons or big real estate developers are the main beneficiaries of 1031 exchanges, the fact is that the bulk of real estate exchanges done in this country are in the $500,000 range and many times less than that. In those situations where the exchange value is higher, in situations involving family held Main Street businesses, farms, ranches and other properties, the value being exchanged represents sometimes multi-generational blood, sweat and tears expended in saving up a nest egg that can be used to improve the taxpayers’ properties and quality of life.</p>

<h2>1031 exchanges strongly influence economic growth</h2>

<p>Biden stated that he wants to limit 1031 exchanges so he can use the revenue gained to improve child care and care for the elderly. However, to that point, owners of elder care facilities and child care facilities have regularly used 1031 exchanges to shed themselves of an outmoded facility and upgrade into facilities that better serve the children and elderly folks in their charge. As prior administrations ultimately concluded, when considering the overall impact, it does not make good business sense to overly limit an investment tool that benefits all Americans, spanning all economic strata and demographics, and is one of the most powerful economic drivers this country has.</p>

<p>There are many requirements to ensure for a <a href="/property-owners/1031-exchange-explained">compliant 1031 exchange</a>. One frequently posed question by potential exchangers pertains to what property is considered "like-kind" to another property. It relates to the term “like-kind” referring to two real estate assets of a similar nature irrespective of class or quality, that (if exchanged by the rules) can be replaced without realizing any taxable gain.</p>

<p>The Internal Revenue Code (IRC) Section 1031 defines like-kind property as any property held for investment or use in a trade or business. The relinquished property and the replacement must be of like-kind to qualify for exchange treatment. Put simply, both properties involved in the exchange must be for use in a trade or business, or investment purposes. So, for example, although a personal residence or a vacation home is real estate, since it is held for personal use and not for investment, it would not qualify for exchange treatment. Property held as part of a dealer's or developer's inventory also does not qualify.</p>

<h2>What is "Like-Kind"?&nbsp;</h2>

<p>The rules provide that the words “like-kind” reference the nature or character of the property and not its class or quality. Under the Regulations, things to consider include “the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, and the duration of the interests.” Based on these provisions, like-kind is defined in the tax code quite liberally in that any real estate is like- kind to any other type of real estate. For example, whether the real estate is improved or unimproved is not significant. Many court cases and rulings have addressed the like-kind standard for real property. Regulations provide examples of like-kind real property, some of which are obvious, others less so. Below are examples of real property interests that can be exchanged for any other type of real estate:</p>

<ul>
<li>Strip center for multi-family rental</li>
<li>Vacant lot for improved property</li>
<li>Improvements on property not already owned</li>
<li>Oil, gas and other mineral interests</li>
<li>Water rights</li>
<li>Cell tower, billboard and fiber optic cable easements</li>
<li>Conservation easements</li>
</ul>

<p>The Regulations also require the replacement property be located within the United States and some of its territories and possessions to qualify as like-kind for property sold in the United States. For example, a taxpayer cannot use proceeds from the sale of an office building in Dallas to acquire an investment property in Mexico. While a Mexican condominium investment sounds like a great retirement plan after the extended rental period is over, it’s not going to pass muster with the IRS when it comes to Section 1031. Property located outside the United States is like-kind only to other property located outside of the United States.</p>

<h2 class="rtecenter">Like-Kind Requirements Takeaways</h2>

<ul>
<li>Like-kind real estate are assets of the same nature or character, irrespective of class or quality that can be exchanged without realizing tax liability under Section 1031</li>
<li>Properties must be held use in a trade or business, or investment purposes but do not need to be similar in class or quality</li>
<li>Any type of real estate is like-kind to any other real estate interest</li>
<li>Many non-traditional real estate interests are like-kind to conventional interests</li>
<li>Properties must be in the United States and some US territories and possessions in order to qualify as like-kind to other properties in the United States</li>
</ul>
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<p>&nbsp;</p>

<p>Be sure to discuss 1031 exchange plans with a trusted Qualified Intermediary such as Accruit. Following the like-kind requirements is just one of several rules that must be adhered to in order to complete a successful <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 exchange">1031 exchange</a>.</p>

<p>Accruit Managing director Max Hansen is co-Chairing the 5th Annual Buying and Selling Ranches in Montana seminar. Along with Gage Hart Zobell of <a href="https://www.dorsey.com/">Dorsey &amp; Whitney, LLP</a>, Max is excited to present a variety of experts to discuss the various aspects of agricultural real estate in Montana. This seminar will be hosted live at the <a href="https://www.northernhotel.com/&quot; target="_blank">Northern Hotel</a> in Billings, MT and will be available for streaming online.&nbsp;</p>

<h2>Who Should Attend</h2>

<ul>
<li>Attorneys/Legal Staff</li>
<li>Accountants</li>
<li>Conservationists</li>
<li>Consultants</li>
<li>Environmentalists &amp; NGOs</li>
<li>Farmers &amp; Ranchers</li>
<li>Government Officials</li>
</ul>

<h2>Why You Should Attend</h2>

<p>Owning a piece of “Montana heaven” is becoming increasingly popular, but unique issues arise when purchasing agricultural assets in Montana. Understanding these unique issues can help buyers, sellers, lenders, attorneys, and consultants to troubleshoot purchases of agricultural assets.</p>

<p>This seminar and its carefully selected faculty is designed to provide insight into those issues most commonly faced, including: public access, environmental issues, water rights, due diligence problems, financing, and succession planning. Anyone involved in the buying and selling of agricultural properties in Montana would be well served to attend and catch up on the latest in buying “a piece of heaven.”</p>

<p>&nbsp;</p>
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<p>&nbsp;</p>

<h3>Course Accreditation</h3>

<p>This course has been approved by the Montana State Bar for a total of 11.25 CLE credits including 1.0 ethics credits (attending and live webcast). This course has been approved by the Wyoming State Bar for 11.25 CLE credits, including 1.0 ethics (attending and live webcast). This course has been approved for 10.0 hours of law and legal credit and 1.0 hours of ethics CLE credit by the Washington MCLE board (attending and live webcast). Self-Study credit will be available, specific credit amount to be determined. This course is pending with the Wyoming Real Estate Commission for 13.5 CE hours (Live Credits for Attending ONLY). Credits for recorded courses not available. This course qualifies for brokers and sales persons for Montana real estate continuing education in the amount of 11.0 CE credits (attending and live webcast). Credits for recorded courses not available. The Seminar Group is an approved CE provider by the Oregon Real Estate Agency, #201212896. This course has been approved for 13.5 CE credits (attending and live webcast). For information or accreditation in other states, please call THE SEMINAR GROUP at (206) 463-4400.</p>

<p>&nbsp;</p>

<p>Accruit Managing Director&nbsp;Max Hansen&nbsp;will be presenting on a panel for the Tax Section of the&nbsp;American Bar Association. He, along with four other 1031 exchange subject matter experts, will be talking about 1031 exchange issues in the era of COVID-19, and how disaster notices from the Treasury have differed from past emergency declarations.<br />
<br />
Although this event is closed to the public, Max and our other subject matter experts are happy to speak to you or your group about your questions or concerns regarding 1031 exchanges.</p>

<p>&nbsp;</p>
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