How do you 1031 Exchange Leasehold Interest of Real Property?

1031 airplane hanger

How do you 1031 exchange leasehold interest? There are many factors that go into a 1031 exchange of leasehold interest. Here is a brief guide.

Leaseholds are often used for cell towers, billboards, wind energy production, solar farms and airport hangers, but can these unique real property interests be exchanged in a 1031?

Determining Your Leasehold Type

The first thing you want to do is figure out what kind of leasehold you have. The major category is leasehold interest of 30 years or more including unexercised options for renewal. If your lease is 30 years or more including the unexercised options, you’re golden. You can exchange that leasehold for any interest in fee title because for federal tax purposes a long-term lease of 30 years or more is considered the equivalent of a fee interest in title. So you could exchange out of a leasehold into a traditional real estate investment.

The other category is of a shorter duration of less than thirty years. If you have the ability to work with your landlord and negotiate for an extension of your lease or potential extensions, that’s a great way to create more flexibility.

Short Duration Leases

If, however, you're stuck with a short duration lease you can still exchange a short duration lease for another short-duration lease. A lot of times we see short-duration leases in airports where there's hanger sites and on top of those hangers are leaseholds that may be for 10 or 15 years but they’re really not the verity of 30 years or more. On top of the hanger leases are the hanger facilities (the buildings in which the aircraft are situated) and a lot of times people want to exchange their old hanger for a larger hanger because they want a bigger plane and in order to accommodate the larger aircraft they also need a larger hanger but the old hanger has a lot of gain built into it.

A lot of times in a busy airport with limited capacity for expansion these properties become very scarce and the scarcity creates a price increase. So long story short, figure out if your lease is long-term or short-term, 30 years plus or less, and then find a matching like-kind replacement property to exchange into.

  • 1031 Hotline: If you have questions about 1031 leasehold interest, feel free to call me at 612-643-1031.

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