When you think of a tax-deferred exchange, you often think of like-kind exchanges and what qualifies
as like-kind. This More, More Monday we will discuss 30 year leases, an often overlooked property that qualifies as like-kind in a 1031 exchange.
Any real property held for productive use in a trade or business or for investment purposes qualifies for 1031 treatment. More specifically, you’re not looking at the specific type of real property, rather the nature or character. You don’t have to sell a single family rental property and acquire another single family rental property. Instead, you can exchange that single family rental property for any type of real property that is held for investment purposes or business use. This includes 30 year leases.
IRS regulations provide that you can exchange a fee title interest for a lease of 30 years or more, including options. If the lease includes optional periods for renewing the lease, these renewal options are included in the term of the lease. For example, a lease of 20 years with two five-year options will qualify under the 30 year lease requirement. A lease of five years with ten 5-year renewal options will also qualify since the taxpayer will have the option to lease the property for 55 years. Lease terms of less than 30 years are not considered like-kind to a fee title interest per Section 1031.
There are many advantages to a 30 year lease including predictable income stream, less real estate management and diversification of real estate assets. If you are contemplating a 30 year lease for your exchange, 1031 CORP. recommends you reach out to your professional advisors to see if it meets your short and long term investment objectives.