In PLR 201408019, the IRS approved a like-kind exchange under Section 1031 involving a safe harbor parking transaction in which the exchange accommodation titleholder (EAT) leased land from a person related to the taxpayer, constructed improvements on the land, and then transferred the leasehold interest and improvements to the taxpayer as replacement property in the exchange.

In this ruling the taxpayer was a partnership whose partners included LP and a taxable REIT subsidiary that was owned 100% by LP. LP was an affiliate of a publicly traded REIT. LP owned, through a disregarded entity, a large, outdated, and vacant office building that was ground leased to another disregarded entity (the “Ground Lessee”) owned by LP.

The taxpayer entered into a qualified exchange accommodation arrangement with an EAT to facilitate a like-kind exchange safe harbor parking transaction. The EAT subleased the land at fair rental value from Ground Lessee (after Ground Lessee has demolished the building) pursuant to a greater-than-30-year term. The taxpayer, or a related entity, advanced money to the EAT to fund construction of improvements on the land, and the taxpayer, or a related entity, oversaw construction.

The taxpayer sold (through a qualified intermediary (QI)) a retail building as relinquished property to an unrelated person in the first leg of a deferred 1031 exchange. The taxpayer completed the second leg of the exchange by purchasing (through the QI) as replacement property the ground lease and improvements that were owned by the EAT.

In PLR 201408019, the IRS noted that Section 1031(f)(1) was not applicable because the taxpayer was exchanging property with the QI, who was not a related person. Section 1031(f)(4) was not applicable because “although a related party provides a part of [the replacement property], there will be no cashing out by any of the related parties within 2 years of the last transfer in the series of transactions.”

Accordingly, the Service ruled that the taxpayer’s exchange qualified for like-kind exchange treatment under Section 1031 and no gain was recognized except to the extent of boot received.

PLR 201408019 is the third private letter ruling in which the IRS has approved of a safe harbor parking transaction involving improvements made to land leased by the EAT from a person related to the taxpayer. Of significance in PLR 20148019, as in the prior two private rulings, at the time the taxpayer acquired the leasehold interest and improvements from the EAT, the leasehold had a remaining term of more than 30 years, thus allowing the property to be treated as real property of like-kind to the relinquished retail building, and the taxpayer represented that neither the taxpayer nor the Ground Lessee would dispose of their interests in the property prior to the end of the two-year period following completion of the exchange. The rulings offer tremendous planning opportunities for real estate owners.

Join Moore McLaughlin, CPA, Esq,, owner of McLaughlin & Quinn, LLC, a tax law firm with offices in Boston and Providence, and owner of All States 1031 Exchange Facilitator, a qualified intermediary for 1031 exchanges, discuss current developments and planning opportunities involving 1031 exchanges on June 3, 2014 at 9 a.m. at the Hyatthouse in Waltham.