How to Deal with Enhanced Development Rights in a 1031 Exchange

Sometimes people are contacted by a government entity or organization and they’re asked to convey enhanced development rights. These are restrictions imposed on the relinquished property in a 1031 exchange that burden the property and run with the land, sometimes perpetually. This article will explain some of the fundamentals of enhanced development rights as they relate to 1031 exchanges.

The 1031 Question

The first question many people have is:

  • I’m going to get this big bill this big amount of cash for the sale of these enhanced development rights – can I do a 1031 exchange on it?

And the answer is yes. In a private letter ruling issued by the IRS, taxpayers have been given the green light to exchange or dispose of development rights and acquire fee title* and replacement properties. Another kind of relinquished property that may be given up are conservation easements that may be perpetual or for durations of 30 years or more. Those are very similar to the restrictions imposed through enhanced development rights. They have to be a significant and substantial (perhaps perpetual) transfer of rights in the property so much so that they are considered the equivalent of the title for federal tax purposes.

*Fee title (also sometimes called “fee simple”) is an estate or interest type of ownership giving the owner the highest possible or best interest in the land (subject only to the absolute sovereignty of the government).

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved