¹Although the Federal long-term capital gain rate is currently only 15%, straight-line depreciation recapture on real estate is 25%. Additionally, the alternative minimum tax may apply and state income taxes may be imposed.

²Under Rev. Rul. 78-72, 1978-1 CB 258, options to renew are counted in determining whether a lease has a term of 30 years or more to run.

³See Regs. Sec. 1.1031(a)-2(b)(1).

⁴Product classes are based on the North American Industry Classification System; see Temp. Regs. Sec. 1.1031(a)-2T(b)(3).

⁵For purposes of the deferred-exchange rules, incidental property is property transferred with a larger item of property in a standard commercial transaction, which has an aggregate fair market value (FMV) not exceeding 15% of the larger propertys value. The incidental property must relate to the larger item of property.

⁶In Rev. Rul. 2003-54, 2003-1 CB 982, the IRS explained how property is classified as personal propertypersonal property includes tangible personal property as defined in the former investment tax credit rules in Regs. Sec. 1.48-1(c). Rev. Proc. 87-56, 1987-2 CB 674, sets forth the class lives of various types of property.

⁷See Sec. 168(c) and (e)(1). Most personal property associated with real estate will have a seven-year recovery period. However, in Ann. 99-82, 1999-2 CB 244, the IRS stated that certain personal property used in rental real estate (such as appliances, carpeting and furniture) would have a five-year recovery period.

⁸See Sec. 168(k)(1).

⁹Hospital Corp. of America, 109 TC 21 (1997), nonacq., AOD 1999-8. For an example of IRS approvals of cost-segregation studies, see IRS LMSB Memorandum for Industry Directors on Planning and Examination of Cost Segregation Issues in Restaurant Business, BNA Daily Tax Report (12/18/03).

¹⁰See Ann. 99-82, note 7 supra.

¹¹See Hospital Corp. of America, note 9 supra; and Piggly Wiggly Southern, Inc., 803 F2d 1572 (11th Cir. 1986).

¹²See Shoneys South, Inc., TC Memo 1984-413.

¹³In Rev. Rul. 2003-54, 2003-1 CB 982, the IRS ruled that gasoline station pump canopies are not inherently permanent structures and are tangible personal property to be recovered over five or nine years, depending on the depreciation system used.

¹⁴See Southland Corp., 611 F2d 348 (Ct. Cl. 1979).

¹⁵Many states, including California, classify items (including property that might otherwise be personal property) permanently affixed to a building as real property; see Cal. Civil Code Section 658.

¹⁶IRS Letter Ruling 8443054 (7/20/84) indicates that state law principles apply to determine if property is real estate for Sec. 1031 purposes.

¹⁷See Bloomington Coca-Cola Bottling Co., 189 F2d 14 (7th Cir. 1951).

¹⁸Rev. Proc. 2000-37, 2000-2 CB 308, allows alternative safe-harbor parking arrangements using a third-party EAT.

¹⁹Rev. Proc. 2004-51, IRB 2004-33, 294, indicates that the IRS continues to study parking transactions in the Sec. 1031 area.

²⁰Rev. Proc. 2000-37, note 18 supra, specifically states that it does not override existing law as to parking arrangements. For a thorough discussion of Rev. Proc. 2000-37, see Borden, Lederman and Spear, Build-to-Suit Ruling Breaks New Ground For Taxpayers Seeking Swap Treatment, 98 J of Taxn 22 (January 2003).

²¹For example, in Fred L. Fredericks, TC Memo 1994-27, the Tax Court upheld tax-free exchange treatment for property improvements to be constructed in the future.

²²See J.H. Baird Publishing Co., 39 TC 608 (1962), acq., 1963-2 CB 4. An accommodator is a person independent of the taxpayer that takes title to the replacement property in the construction exchange, so that the taxpayer does not own both the replacement property and relinquished property at the same time. If the taxpayer were to own both properties at the same time, there could not be an exchange for Sec. 1031 purposes.

²³Generally, a QI will not want to serve directly as the accommodator for the construction, because of liability concerns. A QI is a person that enters into a written exchange agreement with the taxpayer and, as required by the agreement, acquires property from the taxpayer, transfers it and acquires like-kind replacement property and transfers it to the taxpayer. The QI cannot be the taxpayer or the taxpayers agent or related to the taxpayer or the taxpayers agent; see Regs. Sec. 1.1031(k)-1(g)(4)(iii).

²⁴J.H. Baird Publishing Co., note 22 supra.

²⁵Fredericks, note 21 supra.

²⁶Donald DeCleene, 115 TC 457 (2000). However, IRS Letter Ruling 200111025 (3/19/01) recognized a successful Sec. 1031 exchange when the documentation provided that the accommodator would have a risk of loss or an economic benefit from owning the parked replacement property.

²⁷There is no distinction between the assumption of a liability and the acquisition of property subject to a liability; see Regs. Sec. 1.1031(b)-1(c).

²⁸Rev. Rul. 2003-56, 2003-1 CB 985, is an analysis under the Sec. 1031 rules, not the Sec. 752 regulations.

²⁹See Phillip M. Garcia, 80 TC 491 (1983), acq., 1984-1 CB 1, and Fredericks, note 21 supra.

³⁰See IRS Letter Ruling 8434015 (5/16/84).

³¹See, e.g., Fredericks, note 21 supra.

³²In IRS Letter Ruling 200019014 (5/12/00), the IRS ruled that liabilities placed on a replacement property, without a bona fide business reason apart from the exchange, may not be applied under the netting rules.

³³See Rev. Rul. 77-337, 1977-2 CB 305.

³⁴Miles H. Mason, TC Memo 1988-273. However, Mason did not specifically address the Sec. 1031 holding requirement issue.

³⁵Joseph R. Bolker, 760 F2d 1039 (9th Cir. 1985).

³⁶See Regs. Sec. 301.7701-1(a)(2).

³⁷For an example of how not to create a valid co-tenancy relationship, see Delwin G. Chase, 92 TC 874 (1989), in which the tenants-in-common did not execute an escrow agreement, and the partnership continued to manage the property and allocate economic benefits as though the tenancy-in-common distribution had not occurred.

³⁸Rev. Proc. 2002-22, 2002-1 CB 733. For a detailed discussion of Rev. Proc. 2002-22, see McKee, Nelson and Whitmire, Federal Taxation of Partnerships and Partners, Supp. 3.03[5] (RIA, 3d ed., 2005).

³⁹When a Delaware statutory trust, which is a grantor trust, engages in a Sec. 1031 exchange, the grantors trust interest is treated as an ownership interest of the underlying trust assets; see Rev. Rul. 2004-86, IRB 2004-33, 191. This ruling, however, allows the use of a Delaware statutory trust as a disregarded entity only in limited situations.

⁴⁰For further discussion, see Real Property Exchanges (California Continuing Education of the Bar, 3d ed., 2002) pp. 455458.

⁴¹See Secs. 453 and 731. For Sec. 751 purposes, unrealized receivables are defined under Regs. Sec. 1.751-1(c)(1) as rights to payment for property other than a capital asset. Accordingly, an installment note sale of a capital or Sec. 1231 asset, and its distribution by the partnership, would not be subject to Sec. 751(a), except perhaps to the extent gain on a Sec. 1231 asset is treated as ordinary income.

⁴²See the discussion of Rev. Proc. 2002-22 at note 38, supra.

⁴³See Rev. Rul. 75-292, 1975-2 CB 333.

⁴⁴Norman J. Magneson, 753 F2d 1490 (9th Cir. 1985).

⁴⁵The Magneson holding was based on the replacement property being contributed to the partnership for a general partnership interest. Some commentators have suggested that Magneson is no longer applicable to Sec. 1031 exchanges, because it was based on certain California general partnership statutes that have since been amended; thus, this case may have very limited application.

⁴⁶See Emory K. Crenshaw, 450 F2d 472 (5th Cir. 1971), for the application of the step-transaction doctrine to a partnership liquidation followed by a Sec. 1031 exchange.

⁴⁷See the discussion of Rev. Proc. 2002-22 in the text at note 38, supra.

⁴⁸See Regs. Sec. 1.1031(k)-1(b)(2)(ii).

⁴⁹See Regs. Sec. 1.1031(k)-1(c)(4)(i).

⁵⁰See Regs. Sec. 1.1031(k)-1(c)(4)(ii)(B).

⁵¹David Dobrich,188 F3d 512 (9th Cir. 1999).

⁵²See Regs. Sec. 1.1031(k)-1(g)(2)(i)(B).

⁵³Payment of the letter of credit proceeds to the exchanging party will result in that party receiving cash, which could trigger recognized gain in an otherwise tax-free exchange; see Regs. Secs. 1.1031(k)-1(f)(2) and 15A.453-1(b)(3).

⁵⁴See, e.g., Coastal Terminals, Inc., 320 F2d 333 (4th Cir. 1963) and Fredericks, note 21 supra.

⁵⁵The determination of a related party is based on Secs. 267(b) and 707(b)(1).

⁵⁶See Sec. 1031(f)(1). There are exceptions under Sec. 1031(f)(2) for a disposition within the two-year period by reason of the death of either related party, compulsory or involuntary conversion of the exchanged property or any disposition, if neither the disposition, nor the exchange, has as one of its principal purposes the avoidance of Federal income tax.

⁵⁷See S Fin. Rept No. 101-56, 101st Cong., 1st Sess. (1989), p. 151.

⁵⁸The related partys basis in the relinquished property received in the exchange increases to the high basis of the replacement property that the related party transferred in the exchange; see Sec. 1031(d).

⁵⁹Sec. 1031(f)(4) states that transactions structured to avoid the purposes of the Sec. 1031(f) related-party rules will not qualify for Sec. 1031 treatment. In Teruya Brothers, Ltd., 124 TC No. 4 (2005), the Tax Court found that using a QI to purchase replacement property from the exchangers related entity was structured to avoid the purposes of Sec. 1031(f).

⁶⁰See Rev. Rul. 2002-83, 2002-2 CB 927.

⁶¹However, in IRS Letter Rulings 200251008 (12/19/02) and 200329021 (7/18/03), the IRS ruled that the related-party rules do not apply when the related party constructs improvements on the replacement property. In those rulings, an EAT constructed improvements on land leased from a related taxpayer.

⁶²See IRS Letter Ruling 200440002 (10/1/04) (related parties successfully engaged in a Sec. 1031 exchange using a QI and neither party cashed out of its respective exchanged real property).