[12tang]

I know someone who has a business and they have a lease receivable from another company because they allowed them to use part of the land. They want to give up this lease and exchange it for land to be used in the business. Does this qualify for 1031 exchange?

They received a letter stating that if they sold the lease, they could use to money to buy property used for the business and that in most cases, would qualify for 1031 exchange. Will land fit this since it’s a ground lease? What type of asset would it have to be for it to qualify as 1031?

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[Anonymous]

IRC classifies leasehold interests over 30 years as like kind with fee-title real estate. land/building is irrelevant here. what is the long/short term characterization of their lease? 30 years includes extensions so say we got a 10 year lease going with 2 options of 10 year ext. it ends up being 10+10+10=30. i assume its 30 years easily (50 perhaps?) since you mention its a ground lease- who in their right mind would build all those improvements and give them up years later? i assume its decades-long.

shorter term leases can be LKE with other short term leases for land for example. that would solve their 30yr timing problem.

lease LKE (and 1031 transactions in general) are VERY complicated, however. i would have them consult a tax professional, although im pretty confident, i am, after-all, just a guy on a forum lol.

[Anonymous]

oops- sorry your buddy is the lessor NOT the lessee i just reread. in that case no, he is the landlord so no LKE treatment on his “lease receivable.” its pretty much unrealized/future rental income in the eyes of the IRS, and not a real estate asset.

it makes sense logically: for lessee's that rent office space for long term they can sell it and move, buy something else thats worth more in a tax free 1031 exchange.

only a lessee can transfer a leasehold interest, because the lessee OWNS the leasehold and the lessor's property is SUBJECT to the leasehold- the lessor has no right. landlords are shit outta luck in the eyes of the IRS i guess lol

[12tang]

Do you know why he would have received that letter then from the company he's leasing to? The letter specifically says that if he sold the lease, he could possibly qualify for 1031. He's not renting office space, it's a ground lease for a tower. This company is paying him to have their tower on his land.

And thanks for addressing my question. Any help on this is appreciated.

Using Becker self-study
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[12tang]

Bump

Using Becker self-study
FAR: (82) 175 hours - 1st attempt
BEC: (XX)
AUD: (69) 45hrs of study - 1st attempt
REG: (XX)

[Anonymous]

i have no idea what they are trying to do? like a sale leaseback maybe? i am a little confused as to what they are bringing to the table for this exchange?are they trying to say that them giving up the leasehold is their portion…i have no idea to tell you the truth. LKE's are complicated you need a qualified intermediary theres all these rules and time limits i believe i can't help you further unless theres more to the fact pattern. it is inadvisable to generalize in tax.

[Anonymous]

There are plenty of 1031 companies out there who would give you entry level advice for free. They do this stuff for a living. If you want to get more serious about it they start charging fees.

[Missy]

There are many times its wise to tell a friend “I'm flattered you asked me however this is not my area of expertise and I'd recommend you getting advice from someone with experience in these types of transactions”.

Its nice when friends assume that because you're studying for the CPA or even a licensed CPA that you can speak on any tax or accounting matter but thats not true for most CPA's. We all have our strengths and one of them has to be the ability to decline on certain subjects. Getting advice on message board can be helpful but I personally wouldn't make business decisions based on it.

As Smith said, go to a specialist.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[12tang]

Yeah, I cannot help him. Even if I found an answer on here, I'd have to tell him to check with his tax guy. Yes Eesti, it's a lease buy back. He then wants to use those proceeds to buy land for the business.

Thanks guys. You're right Mia, it's nice to be considered the go-to guy but there are definitely limits to the level of information we give out. I tried this forum in case someone could go provide concrete information that I could then research myself. I'd like to think that even though we cannot answer immediately, the answer should be obtainable. Tax is a tricky, tricky beast though…

Using Becker self-study
FAR: (82) 175 hours - 1st attempt
BEC: (XX)
AUD: (69) 45hrs of study - 1st attempt
REG: (XX)

[Author]

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