The proposed exchange would have a qualified intermediary (“QI”) transfer the taxpayer’s existing lease to the existing building’s co-tenant in exchange for the QI transfer of the new lease on the replacement property to the taxpayer. In addition, an exchange of the tangible personal property would be accomplished as well.
The taxpayer sought to have the Service determine whether:
• The leaseholds and personal property are like kind;
• The build-to-suit construction affects the application of §1031 with respect to the 45-day letter;
• How basis and boot in the replacement properties acquired are determined and characterized.
Of course, the general rules for a valid §1031 exchange are axiomatic:
(1) There must be an exchange of property;
(2) The properties exchange must be of like-kind; and
(3) The property transferred and the property received in the exchange must be held for productive use in a trade or business or for investment.
The Service ruled that the exchange of leaseholds qualified as like-kind under Reg. §1.1031(a)-1(c). The fact that the leases might vary in their terms or value relate only to the grade or quality of the leases and not to its kind or class. There was no comment about whether the leaseholds had to be for similar types of leasesholds.
The Service indicated that the fact the replacement property would not be completed by the time it was to be identified by the taxpayer was not material (See Treas. Reg. 1.1031(k)-1(e)(1)), nor was it important that it was being built to the taxpayer’s specifications. (J.H. Baird v. Commissioner, 39 T.C. 608 (1962).)
With regard to the boot issues, the Service indicated that the standard exchange group rules apply in a multi-property exchange such as this transaction, in order to quantify the amount of boot, and require the balancing the corresponding exchange groups. For instance, the personal property relinquished and received was in the same asset class so that aspect of the transaction would be looked at separately from the real estate lease component to determine whether there was boot in each group. Additionally, basis would be applied separately in each property group (real and personal).
The communication is not intended to be a “reliance opinion” within the meaning of Circular 230, and we do not provide tax advice on any matter: therefore we are not providing any guidance to the recipient on a “more likely than not” or higher confidence level and have not assured the recipient of success on such level, if the Internal Revenue Service were to disagree with our conclusions. If such communication were to be considered a “reliance opinion” within the meaning of Circular 230, then the recipient may not rely on such advice for penalty protection. No recipient of the communication may use any information in the communication for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed herein.
