The real property “like kind” rules under IRC Code Section 1031 allow a Taxpayer to exchange a variety of property when used for investment purposes or in the productive use in their trade or business. Therefore a taxpayer can exchange from an apartment building into a vacant piece of land; or from a commercial building into an industrial building, etc.

What many taxpayers do not realize is that a leasehold interest in real property MAY qualify as “like kind” provided that the REMAINING lease term is 30 years or more (including automatic extension provisions). As an example, if a Taxpayer currently owns a leasehold interest in a piece of real property with an remaining lease term of 20 years, typically that property would NOT qualify for 1031 exchange treatment. However, if that leasehold interest had 20 years remaining AND included two 5 year options to renew, then the Taxpayers’ property WILL QUALIFY under 1031 exchange guidelines.

Taxpayers’ should be aware of a recent IRS ruling regarding the Exchange of Leaseholds and Personal Property (PLR 20082019). Under this private letter ruling, the Taxpayer wished to determine by this ruling whether (a) the leaseholds and personal property were 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.