PLR 200805012 Development Rights are Like-Kind to Real Property

February 2008

Taxpayer intends to transfer a fee interest as the relinquished property and acquire development rights, which the taxpayer will use to enhance real property that the taxpayer already owns (the benefited property). This benefited property lies within a special area of the city and is eligible for use of the development rights, which such development rights will permit the taxpayer (or its lessee) to develop the benefited property with greater floor space. The ruling examines whether the development rights are like kind to a fee interest, and if it matters that the taxpayer already owns the benefited property.

The ruling first notes that state law generally determines whether property constitutes real or personal property.  Further, the types of property rights that are like kind real property under § 1031 are broad.  For example, water rights, easements, rights of way, oil and gas leasehold, and tobacco quotas have been considered  like-kind to a fee interest in land.  The ruling then concludes that the development rights in the ruling are like kind to a fee interest. The state tax statutes define "real property" to include development rights.  A local ruling also notes that a transfer of development rights is subject a gains tax as a "transfer of real property." The state municipal law generally defines "development rights" as "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 provide that they are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. As such, these rights appear to be analogous to perpetual rights. Thus, while the development rights are not explicitly granted in perpetuity, such rights do arise out of an interest in the underlying real estate and because there is no expiration date for the development rights, they are effectively perpetual in nature.

Likewise, a deed transfer is similar to the perfecting of development rights, which involves an actual transfer of rights from one property to another. The transfer of development rights must be verified by filings with city, which may require recording of certain easements as a condition of the transfer of development rights.  Evidence of such filings must be submitted to the city register before the transfer document can be recorded.  Certified copies of such filings must be submitted to city’s planning department before the issuance of any building permit for the development or enlargement on a receiving site. Also, the development rights are subject to city and state transfer taxes in the same manner as a deed transfer.  The ruling further finds as immaterial the fact that the taxpayer already owns the benefited property and likens it to acquiring a leasehold with more than 30 years to run on land in property that the taxpayer holds the fee.

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