Can my easement interest qualify for a 1031 exchange?

Although section 1031 of the IRS code has been around since 1921, the concept of 1031 exchanges continues to evolve. And because the code is not crystal clear on some concepts, investors often seek guidance from the IRS – in the form of Private Letter Rulings – about non-traditional exchanges.

One issue that comes up with more regularity than you might think is the concept of exchanging easement interests (conservation or agricultural). First, can they be considered as “like-kind” to real estate? Second, do they qualify for an exchange.

The IRS issued several private letter rulings finding that certain types of conservation and agricultural easements are, in fact, “like-kind” to real estate. Of course, since it is the IRS, there are certain caveats to this determination.

First, you must be clear about what a conservation easement is. It is a voluntary agreement entered into by landowners (who maintain ownership of the land itself) that conveys certain rights and limits the type or amount of development on their property.

In order to qualify for 1031 exchange treatment, a conservation easement must be perpetual in nature and considered an interest in real estate under state law in order to be considered “like-kind” to real estate. The land owner may receive cash or a charitable deduction in return for granting the easement. In the case of a cash payment, the recipient landowner may look to a 1031 exchange in order to defer the capital gains taxes on those proceeds.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.