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1033 Replacement Property

Highlighted
Level 2

Hi everyone,

I have a question regarding a replacement property for an involuntary conversion. So the details of this is that the client who rents commercial real estate had a parcel that the city was interested in acquiring. The parcel had an office building on it. However the city wanted to acquire only one half of the parcel for eminent domain and then the other half that had the office building on it would be rented through a temporary construction easement (TCE) for about 3 years and possibly extended for 2 years. The acquisition of the land occurred in 2019 and the TCE actually happened in 2017.

I have a couple of questions about this:

1) Since the land portion is the piece being acquired, can my client take the proceeds and invest it in commercial or residential real estate with a building on it? When I read 1.1033(a)-2(b) (https://www.law.cornell.edu/cfr/text/26/1.1033(a)-2), I feel that it should be ok since the relinquished property was used for the rent of commercial real estate. The client wants to use the replacement property in the same way as the relinquished property.

But then I read 1.1033(a)-2(c)(9)(i) and it said that the proceeds of unimproved real estate, taken upon condemnation proceedings, are invested in improved real estate could not be deferred. So it made me question if the replacement property can be a property with a building on it if the funds that were received were for the acquisition of the land.

I am leaning towards it being ok since it's a replacement property for rent. This is what it was for if you consider the whole parcel. But I'd like to hear what other people thought.

2) For the TCE, I wanted to see if there was some way I could include that gain as deferral. I found PLR 201015015 (https://www.irs.gov/pub/irs-wd/1015015.pdf) which had a taxpayer that was able to use funds from a temporary easement for a replacement property. However in that situation, the state agency had the option to take ownership of the temporary easement. The client's situation does not have that.

However, I wanted to make an argument about them being able to because they don't have any way to use the property even though they're getting compensated. Another issue though is that the client received rental income for the TCE back in 2017 for the three years it was being rented. It may be extended to two years later on.

For this one, I was thinking there's nothing I can do to defer the rental income as gain since it was already recognized in 2017. But I was wondering is there a way I can defer it if they decide to extend the TCE another 2 years?

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2 Replies 2
Highlighted
Level 14

Temporary easement payment is rent.

A somewhat scholarly discussion is going on here:

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=18355  

 

You have to read thru it - other matters are also discussed.

 


ex-AllStar
Highlighted
Level 2

Thanks for the link. Yeah, I had read that temporary easement payments are considered rent. That PLR though allowed the taxpayer to defer the funds received for its temporary easement as deferred gain for 1033 purposes. I was going to see if there was any other other sources that might be similar. 

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