Conservation Credits and Development Rights are Like-Kind to Real Estate

Recent Private Letter Rulings have ruled that conservation easement credits and tranferable development rights are like kind to a fee interest in real estate.

PLR 200649028 regarding Conservation Easement Credits dealt with the question of whether future development restrictions conveyed by a taxpayer under a state conservation program would qualify as being like kind to a fee interest in real estate. In this case, a county issued "credits" to a taxpayer for a conservation easement. The credits were sold to a buyer and the taxpayer used the money to purchase replacement real estate - all with the assistance of a Qualified Intermediary. The IRS ruled that the credits represented an interest in real estate for both the seller and the buyer.

PLR 200805012 held that Transferable Development Rights ("TDR"s) are a qualifying interest in real estate which is like kind to a fee interest in real estate if they are considered real estate under state law. In this case, the taxpayer proposed to sell (exchange) real estate and replace with the purchase of TDRs. Another interesting aspect of this ruling is that the TDRs were to be used to construct improvements on a property already owned by the taxpayer. The IRS ruled that the TDRs were like kind to a fee interest real estate. It is unclear whether the IRS condoned the use of the proceeds for improvements on property the taxpayer already owned as replacement property.

These rulings are useful for purposes of demonstrating the current thinking of the IRS on these issues. However, taxpayer beware! Private Letter Rulings are specific to that taxpayer's question. The IRS has the right to rule differently on subsequent occasions. Also, conservation programs can vary significantly from state to state. The assistance of a tax professional, real estate attorney and qualified intermediary is essential when determining how best to structure your conservation easement or development rights exchange.