SECTION 1031 EXCHANGES AND CONSERVATION EASEMENTS
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 being
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
"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
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.