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By David T. Wagner
With the recent release of Private Letter Ruling 200805012 (“PLR”)
on February 1, 2008, the Internal Revenue Service (the “Service”)
has signaled a willingness to treat transferable development
rights (“TDR’s”) as real property for purposes of effecting a
tax-deferred exchange under IRC §1031. While TDR’s also exist in
numerous Counties in Maryland, this article seeks to review the
analysis of the PLR, which was founded upon the underlying state
and county law, and determine whether the application of Maryland
and Montgomery County law would produce the same result.
The PLR addressed
the ability of a taxpayer (“TP”) to acquire, as replacement
property, development rights and whether those rights would be
considered “like kind property” under §1031.
The basic facts presented to the Service were:
1. TP owned property A and property B;
2. TP planned on selling property A to a third party and
entering into a §1031 transaction.
3. TP intended to acquire development rights from a third party
as the replacement property and use those rights to enhance the
value and increase the density for TP’s development of property
B.
The PLR provides that the determination of whether TDR’s are
sufficiently “like kind” to be utilized in §1031 transactions
turns on whether, under state and local law, development rights
are “interests in real property.”
The jurisdiction in question had statutes granting the following
definitions to the following terms:
(i) “real property” - every estate or right, legal or equitable,
present or future, vested or contingent, in lands, tenements or
hereditaments …;
(ii) “interest in real property” - title in fee, a leasehold
interest, a beneficial interest, an encumbrance, development
rights….; and
(iii) “development rights” - the rights granted to a lot or
parcel of land under a zoning ordinance or local law respecting
permissible use, area, bulk or height of improvements executed
thereon.
The local ordinances further provided that the TDR’s are “as of
right” and “not discretionary,” which the Service interpreted as
indicative of a permanent existence and therefore analogous to
perpetual rights.
The PLR goes on to discuss the process by which the TDR’s were
transferred, including the recording of easements, the
registration of the TDR’s and the conveyance of the TDR’s by
deed. Based on this set of circumstances, the Service determined
that the TDR’s should be considered “like kind property.”
The question presented is whether this same treatment would be
given to TDR’s in Montgomery County.
The Annotated Code of Maryland, Real Property Article, Title 1,
§1-101(k) defines “Property” as “real property or any interest
therein or appurtenant thereto.”
The Montgomery County Code, Chapter 59, Article 59-A, Division
59-A-2, §59-A-2.1 defines (i) “Development Rights” as “[t]he
potential for the improvement of a parcel of real property,
measured in dwelling units or units of commercial or industrial
space, existing because of the zoning classification of the
parcel,” and (ii) “Transfer of Development Rights” as “the
conveyance of development rights by deed, easement or other
legal instrument authorized by local law to another parcel of
land and the recordation of that conveyance among the land
records of Montgomery County, Maryland.”
These definitions are substantially similar to the definitions
contained in the laws of the jurisdiction analyzed in the PLR.
Further, the process of transferring the TDR’s in Montgomery
County is substantially similar to the process followed by the
jurisdiction in the PLR.
The similarities between our laws and the laws set forth in the
PLR lend support to the proposition that TDR’s in Montgomery
County constitute “like kind” property.
That said, we note that the PLR binds the Service only to the
taxpayer who requested it and provides no binding authority upon
which other taxpayers may rely.
David T. Wagner is an attorney in the Real Estate and
Business Practice Groups at McMillan Metro, P.C. Mr. Wagner’s
practice area concentrates on commercial real estate, title,
contract negotiations, settlements, commercial leasing, lender
representation and collection of water and sewer charges. He may
be reached at
dwagner@mcmillanmetro.com and 240-778-2312.
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