Chapter § 55.3 LIKE-KIND REQUIREMENT

• Jurisdiction: Oregon

§ 55.3 LIKE-KIND REQUIREMENT

An exchange is tax free only if the relinquished property is exchanged for replacement property that is of "like kind." IRC § 1031(a)(1). The term like kind refers to "the nature or character of the property and not to its grade or quality." Treas Reg § 1.1031(a)-1(b).

§ 55.3-1 Real Property

The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale.

Treas Reg § 1.1031(a)-1(b).

§ 55.3-1(a) State Law

Whether property is treated as real property is generally controlled by state law. See Oregon Lumber Co. v. C.I.R., 20 TC 192, 195-96 (1953). However, if an interest in real property is only a right to future income, it will not be considered as real estate. C.I.R. v. P. G. Lake, Inc., 356 US 260, 267-68, 78 S Ct 691, 2 L Ed 2d 743 (1958). However, the basic concept that state law controls appears to be breaking down. See Kelly E. Alton and Louis S. Weller, Does State Law Really Determine Whether Property Is Real Estate for Section 1031 Purposes?, 32 Real Est Tax'n 30 (4th Quarter 2004).

§ 55.3-1(b) Long-Term Leases

Thirty-year leases are of like kind to a fee interest in real estate. Century Elec. Co. v. C.I.R., 192 F2d 155, 160 (8th Cir 1951), cert den, 342 US 954 (1952); Treas Reg § 1.1031(a)-1(c); Rev Rul 76-301, 1976-2 CB 241; Rev Rul 60-43, 1960-1 CB 687; Priv Ltr Rul 83-04-022 (Oct 22, 1982). Leases shorter than 30 years are not of like kind to a fee interest in real estate. VIP's Indus. Inc. v. C.I.R., 105 TCM (CCH) 1890 (2013) (remaining term of 21 years and 4 months); Capri, Inc. v. Comm'r of Internal Revenue, 65 TC 162, 181-82 (1975).

In determining whether a lease term is sufficient for the lease to be considered equivalent to a fee interest in real property, renewal options are treated as though they will be exercised. Rev Rul 78-72, 1978-1 CB 258.

Real property subject to a long-term lease (i.e., the lessor's reversionary interest) is still treated as real property and can be exchanged for other real property as part of a tax-free exchange. Koch v. Comm'r of Internal Revenue, 71 TC 54, 69-70 (1978); Rev Rul 76-301, 1976-2 CB 241.

Government 10-year renewable leases, which from a practicable point of view were of unlimited duration, were held to be eligible for exchange with realty. Priv Ltr Rul 91-26-007 (June 28, 1991).

§ 55.3-1(c) Land Sale Contracts

A purchaser's interest in a land sale contract is of like kind to a fee interest in real estate. Starker v. United States, 602 F2d 1341, 1354-55 (9th Cir 1979); Biggs v. Comm'r of Internal Revenue, 69 TC 905, 915-16 (1978), aff'd, 632 F2d 1171 (5th Cir 1980). A seller's interest in a land sale contract, however, is equivalent to a secured promissory note and cannot be the subject of a tax-free exchange. See Mary B. Foster and Jeremiah M. Long, Tax-Free Exchanges under § 1031, § 2.7, § 2.8, § 2.31 (2014).

§ 55.3-1(d) Timber

State law governs whether property interests are treated as real estate or personal property. Aquilino v. United States, 363 US 509, 513, 80 S Ct 1277, 4 L Ed 2d 1365 (1960). Cf. Kelly E. Alton and Louis S. Weller, Does State Law Really Determine Whether Property Is Real Estate for Section 1031 Purposes?, 32 Real Est Tax'n 30 (4th Quarter 2004). Under Oregon law, standing timber can be sold as real property or as a cutting contract. The applicable timber-deed provisions are analyzed in § 55.3-1(d)(1) to § 55.3-1(d)(5).

§ 55.3-1(d)(1) Obligation to Sever

Timber rights that require the timber to be severed are treated as goods under the Uniform Sales Act or its successor, the Uniform Commercial Code, or those rights are simply defined as personalty. See, e.g., Paullus v. Yarbrough, 219 Or 611, 637, 347 P2d 620 (1959). The Paullus court adopted the position that "'growing trees . . . may be converted into "goods" . . . not only when it is agreed that title shall pass after severance, but also when the contract is one of present sale; if such contract provides for severance.'" Paullus, 219 Or at 629 (quoting Burdick on Sales 30 (3d ed)). However, when the contract is silent on severance, the Oregon Supreme Court has held the contract to be the sale of real property enforceable in equity. Reid v. Kier, 175 Or 192, 208, 152 P2d 417 (1944). Thus for purposes of state law, the key to determining whether an interest in timber is one of real property or personalty is whether the contract requires severance of the timber.

The United States Tax Court considered a contract in which land was exchanged for an equal value of timber. Oregon Lumber Co. v. C.I.R., 20 TC 192 (1953). The taxpayer "agree[d] to cut and remove[] an equal value in National Forest timber" from a designated...