PLR 200842019

The transaction involved the exchange of leases, leasehold improvements and office equipment and furnishings.    The taxpayer leased a portion of a building which grew too small for its needs and its co-tenant fellow lessee wished  to take over the taxpayer’s space.   The real estate replacement property would be a qualifying lease of a new building to be  constructed together with leasehold improvements to be paid for by the business entity which will be expanding into the taxpayer’s existing relinquished property space. Of course, the taxpayer would also acquire like class personal property to replace the office  furniture and equipment it was relinquishing.

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 wished to determine by this ruling request whether:
a) the leaseholds and personal property  are like kind;
b) the build-to-suit construction affects the application of §1031 with respect to the 45-day letter; and
c) how basis and boot in the replacement properties acquired are determined and characterized.

The Service ruled that the exchange of  leaseholds   qualified as like-kind under Treas. 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 leaseholds.

The IRS indicated the fact the replacement property would not be completed by the time it was to be identified by the taxpayer was not material nor was it important that it was being built to the taxpayer’s specifications.  See Treas. Reg. 1.1031(k)-1(e)(1) and  J.H. Baird v. Commissioner, 39 T.C. 608 (1962) respectively.

In regards to boot, the IRS stated the standard exchange group rules which require a multi-property exchange as in this transaction to be applied and boot to be determined by balancing the corresponding groups.  For instance, the personal property relinquished and received was in the same asset class so that aspect of this 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).

Source: The Federation of Exchange Accommodators. PLR 200842019