Oct, 2009

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Did you know that if you own land and sell an easement to that land to a government agency, it is likely that your transaction is eligible for Section 1031 exchange treatment?

Emergency Watershed Protection Program (EWPP) and Wetlands Reserve Program (WRP) easements are iowa 1031 exchangebeing purchased by the Iowa Department of Natural Resources and similar agencies in other states. While the owners of the land retain title to the residual value of their land after the easement is recorded, the sale of the rights to this easement can be exchanged for other real property. This is an excellent means to acquire additional acreage or investment real estate.

For a time, WRP easements were not eligible for Section 1031 exchange treatment. This was due to the fact that the assignment of the purchase agreements was not permitted in the written agreements. Purchase agreements must be assigned to the qualified intermediary for an exchange to proceed, so this prohibition effectively disallowed WRP easements from Section 1031 exchange treatment. In an effort to correct this injustice based upon a misunderstanding, this author contacted all of the Iowa congressmen, including both Senators from Iowa. On October 23rd, 2009, I received an email from Representative Leonard Boswell, a portion of which said the following:

"On October 2nd the Chief Financial Officer at USDA came out with a decision paper regarding obligations and payments for IRS 1031 exchanges. There was concern that USDA could not legally "move" an existing obligation for an easement to a new party.

"Based on discussions with the Office of General Council, the obligation was originally with the landowner, who had the legal ability to assign their rights to a second party. Once NRCS approves this assignment, it would also include the right to the payment for the easement. However, the underlying obligation remains with the landowner and they are making an adjustment in the financial system as an "alternate payee". You will be pleased to know that USDA has resumed 1031 exchanges."

The essence of these comments indicates that the USDA originally thought that by assigning the agreements to an intermediary for a Section 1031 exchange, the obligation of the easement would also be transferred. Although that was never true, it took some time for the USDA to satisfy itself on the fact. Now that they are comfortable with the situation, Section 1031 exchanges are again allowable for WRP easement sales.

If you would like additional information about this subject, please contact us. We are handling a number of Section 1031 exchanges right now for other easement sellers.