Can you claim a 1031 tax deferred exchange on funds received for a perpetual easement for a cell tower?

Question

Also can the funds be used to purchase a personal residence?

The easement covers approx. 2.75 acres of a 10 acre tract. The expiration of easement would be if the Tower ever went into a non use state. If 1031 is possible what can funds be invested in?

Answer 1

Section 1031(a) provides that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment (relinquished property) if the property is exchanged solely for property of like kind (replacement property) that is to be held either for productive use in a trade or business or for investment. Under § 1031(b), if a taxpayer also receives cash or property that is not like-kind property (boot) in an exchange that otherwise qualifies under § 1031(a), the taxpayer must recognize gain to the extent of the boot. Section 1031 does not apply to property that is used solely as a personal residence.

The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation.

Answer 2

That's not a like-kind exchange.

The sale of an easement reduces your basis in the portion of the property that the easement applies to. The tax isn't assessed until you sell the property unless the easement reduces the value of the affected property to less than zero. In that case, your basis becomes zero and the excess is taxed as a capital gain.

You can do anything with the funds that you want to.

Answer 3

If you receive cash in a like-kind exchange, you're going to have a taxable amount based on the cash you received.

Here's the formula:

Taxable gain = Cash received + FMV of boot received - FMV of boot given

(Taxable gain is the lesser of this formula or the actual gain.)

"FMV" is the fair market value at the time of trade

"Boot" is anything given of value along with the trade. It can be cash, stock, relief from debt, baseball cards, etc. "Boot" can be given or received in the trade.

Example:

If you traded the title of your property for for a car and $1000 cash, the property and the car are the non-cash trade, and the cash is the "boot". You're going to pay taxes on the $1000, but you can never pay more than your actual gain. If you incurred a loss, you won't pay taxes at all but will have a deduction that enters the capital gain netting process.

At the same time, you're going to have to determine the new "basis" for your new car, as the others said above.

Answer 4

The question is "CAN John attempt this..." the answer is "sure, he CAN attempt this." yet he truly would not could. If he lived in "A" for a minimum of two of the perfect 5 years, he can promote "A" and $250k of his income is tax loose. (you probably did not say... it truly is unlike a $2Million sources, is it?) tell "John" to attempt this... and because you're in an same project, you do it too. purchase "A". stay in it a minimum of two years. Then purchase and pass "B". promote "A" any time before the subsequent 3 years are accomplished, or maybe as expenditures are up. purchase "C" even as the cost is down.