The ruling notes that not all interests defined as “real property interests” for state law purposes are of like kind. For example, even if a short-term lease (one with less than 30 years to run) is an interest in real property under state law, it is not of like kind to a fee interest in real estate for federal income tax purposes. However, a 1955 Revenue Ruling1 determined that land could be exchanged for perpetual water rights: The ruling held that the fee interest in the land and a “water right in perpetuity” are of like kind.
Four years later, in 1959, another IRS Revenue Ruling2 noted that a tax paying entity was granted an easement of indefinite duration over specified portions of its land: The ruling concludes that the easement constitutes ”an interest in real property.” Then in 1972, yet another Revenue Ruling3 held that an easement and right-of-way are properties of like kind to both real property with nominal improvements and real property improved with an apartment building.
This trio of precedents persuaded the IRS to grant Alpha’s recent ruling request.
Indeed, in the 2008 Revenue Ruling, Alpha proposes to exchange development rights for a fee interest in real estate, a leasehold interest in real estate of 30 years or more remaining, and land use rights for hotel units. Significantly, the development rights to be conveyed will be “in perpetuity” and are “directly related and requisite to [Alpha's] interest, use, and enjoyment of the underlying land.”
Moreover, although this was not dispositive, these development rights are, for state law purposes, characterized as interests in real property. Accordingly, the intangible development rights to be transferred by Alpha were found to be of like kind to a fee interest in realty, a leasehold interest in real estate with 30 years or more remaining, and land use rights for hotel units. As a result, Alpha will not recognize any gain or loss on the exchange of these development rights for the package of conventional real estate interests and land use rights it is scheduled to receive in the deferred like kind exchange.
Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com
1 Rev. Rul. 55-749, 1955-2 C.B. 295.
2 Rev. Rul. 59-121, 1959-1 C.B. 212.
3 Rev. Rul. 72-549, 1972-2 C.B. 472.