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Leasehold Interest of Less Than 30 Years Not Like-Kind to Fee Simple Interest

Taxpayer Owns Leasehold Interest and Motel

The taxpayer in this Tax Court Case (VIP's Industries, Inc., June 24, 2013) owned a leasehold interest that had a remaining term of twenty-ond (21) years and four (4) months.  The taxpayer had also constructed and was operating a motel on the property as part of the leasehold interest (hereinafter referred to as the "relinquished property").

Taxpayer Sells Leasehold Interest for Fee Simple Interest

Taxpayer sold the leasehold interest and motel and structured a tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Service (hereinafter referrred to as "1031 Exchange") by exchanging the leasehold interest and motel for two (2) other fee simple interests in two (2) real properties, one of which had a motel operation and the other one had an office building (hereinafter referred to as "replacement property").

Is Leasehold Interest Like-Kind to Fee Simple Interest

It is widely known and accepted that a leasehold interest of thirty (30) years or more, including any options, is considered to be a fee simple interest in real estate where leasehold interests of less than thirty (30) years are considered personal property. 

The taxpayer in this case is asserting that the leasehold interest of just over 21 years and the improvements consisting of the motel are like-kind property to the fee simple interests and motel improvements that he exchanged into.   

Tax Court Rules Not Like-Kind Property

The issue to be decided by the Tax Court was whether or not a leasehold interest in real property with a remaining term of twenty-one (21) years and four (4) months (or in otherwords less than thirty (30) years) was in-fact like-kind to the fee simple interests acquired in.

Not surprising, the Tax Court held the leasehold interest described above as the relinquished property was not like-kind property to the fee simple interest acquired as the replacement property.  The Tax Court denied the taxpayer's tax-deferred exchange treatment.

So, for now, until other guidance is provided, a leasehold interest of thirty (30) years or more is considered like-kind property to other real estate, but a leasehold interest of less than thirty (30) years is not like-kind to other real estate.

Reader Comments (4)

accredited investor status is required for DST exchange. This is not in the DST law. Is this a company requirement or is this a SEC ruling?
November 14, 2013 | Unregistered CommenterVAC
Amazing blog and very interesting stuff you got here! I definitely learned a lot from reading through some of your earlier posts as well and decided to drop a comment on this one!
February 2, 2015 | Unregistered CommenterWeb Developers
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Very informative, keep posting such good articles, it really helps to know about things.
April 2, 2015 | Unregistered CommenterWeb Developers Delhi

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