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PLR 9232030 & Sec. 1031 Exchanges

One of the most fascinating things about Section 1031 tax law is that relatively few cases have been resolved in court. Most of the opinions shaping the mechanics of Section 1031 exchanges, including PLR 9232030, come from non-authoritative sources, such as Revenue Procedures and Private Letter Rulings directly from the IRS. Documents from the IRS may be extremely useful for avoiding litigation, but they’re not the same as law.

PLR 9232030 Isn’t the Law

Only Congress, and Congressionally-appointed administrative agencies, create law. The IRS can state its opinion, but that’s not the same thing as making law. Accordingly, many potential issues with Section 1031 have only tentative resolution through IRS documents, including the one we discuss today. In Private Letter Ruling 9232030, the IRS issued an opinion on the qualification of a certain relinquished property; namely, a perpetual agricultural conversation easement. In this post, we will go over the opinion issued in PLR 9232030 and discuss its implications.

The Basic Requirement of Like-Kind Real Property

The link-kind requirement is one of the four basic requirements of Section 1031. The other, basic, requirements are eligibility, holding, and actual transfer. The IRS broadly interprets the like-kind requirement. That is, as long as a certain ownership interest is regarded as “real property” under local law, it’s like-kind to the relinquished real property.

Generous to Taxpayers

This means that a fee simple interest in a residential rental property will be like-kind to a 30-year leasehold. That is, at least as long as that leasehold is regarded as real property under local law. This broad interpretation is generous to taxpayers. It can, however, be counter-intuitive from a legal perspective. The tax code also states that a real property assessment depends on its nature, rather than its grade, or quality. That’s why a piece of raw land can be like-kind to improved land, which has a physical structure already built on it.

Agricultural Conservation Easement

In Public Letter Ruling 9232030, the IRS grappled with the question of whether a perpetual agricultural conservation easement was like-kind to a fee simple interest in real property. An easement is a right to use a certain piece of land, typically with certain restrictions. In this case, the restriction is that the land can only be used for agricultural production.

The IRS Referenced Previous Opinions

In PLR 9232030, the IRS opined that the perpetual agricultural conservation easement was, in fact, like-kind to a fee simple interest in real property. In this scenario, the taxpayer entered into a contract with a qualified intermediary and fulfilled all obligations specified by the tax code. The taxpayer wished to sell its easement to the State and acquire a replacement property, from another party. In its opinion, the IRS referenced a couple of previous opinions involving fee interests exchanged for non-fee interests.

Water Rights Were Like Kind

The IRS referenced Revenue Ruling 55-749, for instance. In that ruling, the IRS states that perpetual water rights are like-kind to a fee interest in real property. The IRS rested its opinion on the fact that the water rights were classified as real property under applicable local law. The IRS also referenced Revenue Ruling 72-549. In that ruling, an easement and “right of way” were both like-kind to fee interests in real property.

Sufficiently Similar

The IRS cited these earlier rulings as precedents for its PLR 9232030 decision. The perpetual agricultural easement under consideration was considered sufficiently similar to these other kinds of limited interests. And, the agricultural easement was also regarded as real property under local law.

Boundaries of Like-Kind Requirement Still Unclear

The opinion in PLR 9232030 is interesting. Nonetheless, we need to remember that it only has limited value as a statement on Section 1031 mechanics. What happens, for instance, if the determination under local law is clearly at odds with the common understanding of what constitutes real property? In that case, we may see the IRS differ from the determination made by local law. In such a circumstance, that could lead to litigation. That litigation, in turn, could formally change the like-kind requirement. If that happens, we might see a narrowing of the interpretation of the like-kind requirement, with less weight given to local law determinations. That’s all speculation for another day, however. At this point, it’s still safe to say that the requirement receives a broad interpretation.

Seek Competent Counsel

Potential issues related to the like-kind requirement are the reason why you need to obtain competent counsel, if you have an upcoming 1031 exchange. If you think your exchange may involve any sort of controversial matter, you should consult with a qualified tax attorney.

Call Us About PLR 9232030

At Mackay, Caswell & Callahan, P.C., we strive to offer the best possible counsel to our clients. We regularly give consultation relating to federal tax debt, Section 1031 exchanges, New York State income tax debt, and other related issues. If you have a 1031 exchange or other tax case, reach out to us today. Contact one of our top New York City tax attorneys and we will see that your case receives immediate attention.

Image credit: Dmitry Karyshev