development rights are like-kind to real property

Nov, 2008

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A Private Letter Ruling issued by the IRS relating to a taxpayer's intention to acquire development rights as his replacement property in a 1031 exchange is an interesting situation. In this case, the taxpayer sold a property as his relinquished property in the exchange and gave up his fee interest in that property. As his replacement property, he desired to purchase unused development rights to use on property he already owned in order to do more with the property than was allowed prior to the purchase of those rights. (See Private Letter Ruling 200805012.)bundle of rights small.jpg

"Development rights" are one of the "bundle of rights" that one typically possesses with the ownership of real property. The "bundle of rights" include such rights as the right to possess, use, modify, develop, lease, or sell the land. Many of us are aware of mineral rights, which constitute one of the items in the bundle. If mineral rights are separated from the remaining items in the bundle, the owner is prohibited from doing such things as drilling for oil or mining the land. The right to develop is another of the rights within the bundle. If a property owner sells the development rights to his property, the remaining rights remain as before. Development rights can be sold to the owner of another parcel who wishes to develop his property and is unable to do so without those rights.

There are a couple of prerequisites to qualify. First, development rights must be considered real property by the state. And second, those rights must be perpetual, or at least if they are not explicitly granted in perpetuity, there must be no expiration date for the development rights so that they are effectively perpetual.