Development Rights are Like Kind to Fee Interest in Real Estate

A newly released private letter ruling, PLR 200901020, reaffirms the IRS's view that development rights are a qualifying interest in real estate which can be like kind to a fee and other interests in real estate for purposes of an exchange under IRC Section 1031. PLR 200805012 previously affirmed the same. Accordingly, development rights can be exchanged for a fee interest in real estate and vice versa.

In order for development rights to be like kind to fee interest in real estate under IRC Section 1031, it is necessary for the state the rights are located in to view such rights as a real estate interest and for the rights to be in perpetuity (as distinguished from rights which are short-term or for a limited period of time). Perpetuity is important. Short-term rights may be an interest in real estate under state law but are not like kind to a fee interest in real estate under IRC Section1031. PLR 200901020 makes this clear.

A qualifying interest in real estate which can be like kind to a fee interest in real estate under IRC Section 1031 can include varying types of real estate interests. PLR 200901020 examines such other types of qualifying interests in real estate including –

• Leasehold interests of 30 years or more
• Easements
• Rights-of-ways
• Water rights
• Mineral rights
• Royalty rights
• Mineral leases

All of these types of real estate interests are considered like-kind to each other under IRC Section 1031 and may be exchanged for each other.

While the privage letter ruling can not be cited as precedent, and the IRS has the right to rule differently on subsequent occasions, it is a useful ruling for the purpose of demonstrating the IRS's view for similar situations. To receive a copy of the PLR, give us a call at 888-367-1031 or send us a message at 1031@1031cpas.com.