IRS 1031 Exchanges from Fee Simple into Leasehold Interests
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Given that fee simple, single tenant, single parcel, national credit, long corporate triple net or absolute net leased retail opportunities are as hot as they are for 1031 exchanges, buyers are looking at alternatives such as purchasing leasehold interests or a fee simple ground lease. I’ll cover leasehold interests in this post and get into fee simple ground lease in the next one
IRS Section 1031 exchanges typically involve the sale of fee simple real estate property (relinquished property) and the acquisition of like-kind (replacement property). Property bought and held for investment is like-kind with any other property held for investment.
A fee simple real estate held for investment purposes is the most common property type exchanged. Other types of ownership interests may be used as well such as leasehold interests for 1031 exchange purposes. Always check with your tax professional before the consideration of leasehold interests. They generally can be used in 1031 exchange transactions, but check the rules as different rules apply to each situation. While not as common as fee simple exchanges, leasehold interests can be of benefit when used in appropriate circumstances and with the advice of a tax expert.
In many instances, fee simple real estate can be exchanged for leasehold interests. Internal Revenue Service regulations state that a leasehold interest of 30 years or longer is like-kind with fee simple real estate. The IRS has subsequently ruled that option renewal periods are included in determining the leasehold interest length. I interpret this as – if the initial period of the lease is 20 years and there four five-year options, then the length of the lease is 40 years for 1031 purposes.
Leasehold interests of 30 years or less are not like-kind with fee simple real estate; they may be considered like-kind with other short-term leasehold interests. Again, consult your tax expert before you do it!
Please notice how many times I’ve recommended that you consult with your tax expert BEFORE you do it.
