development rights are like-kind to real property
Nov, 2008
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.)
"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.