Estate and Succession Planning
Dean Mead’s Estate and Succession Planning Department is one of the largest and most respected groups of estate planning attorneys in Florida. We are frequently…
Florida’s Water Crises: Can We Afford The Solutions? (Part III)
As we’ve discussed in Part I and Part II, the renewed focus on water projects due to discharges from Lake Okeechobee and the occurrences of blue/green algae is accompanied by a renewed effort to involve private landowners in the development of water attenuation projects. We’ve now explored the exceptions to the general rule that government payments received by private landowners are included in gross income[1] found in §§ 118 and 126. In this final installment, we will broadly discuss a few creative options that may better suit the taxpayer’s needs, depending upon the circumstances, or for taxpayers who don’t qualify for the statutory exceptions.
If the restriction on the use of the taxpayer’s land (i.e. a conservation easement or water impoundment easement) rises to the level of a transfer of enough of the bundle of rights to be characterized as a sale, certain deferral opportunities are available. If the subject land is held for productive use in a trade or business or for investment, the taxpayer may defer any gain by exchanging the property for replacement property of a like-kind that is to be held for productive use in a trade or business or for investment under § 1031.[2] Utilizing §1031 for a deferred exchange comes with strings attached in the form of strict requirements for timing and control of proceeds.[3] Whether property is like-kind is a case by case determination; however generally a sale of an interest in real property is considered like kind to the acquisition of other real property.[4] Further, a leasehold interest in real estate for at least thirty (30) years is considered like to a fee simple interest in real property[5] and, in some cases, it may be possible for a thirty (30) year conservation easement to receive similar treatment to a lease of the same duration.[6]
If a taxpayer’s land is subject to “involuntary destruction, theft, seizure, requisition or condemnation, or disposition under threat or imminence of requisition or condemnation,” by an entity having condemnation authority, the taxpayer can defer gain under § 1033 by purchasing “property similar or related in service or use” to the converted property.[7] This provision operates very similarly to § 1031, but has far more lenient requirements.[8] “Similar or related in service or use” is not specifically defined in the Code or Regulations, but qualification generally hinges on whether there is similarity in the relationship of the services or uses which the original and replacement properties have to the taxpayer.[9] Section 1033 is elective, and the election is not irrevocable.[10]
Even if complete nonrecognition of gain is not possible, classification of an item as a capital asset may enable a noncorporate taxpayer to qualify for preferential rates.[11] If a taxpayer grants a conservation easement over their property for government funds, then the proceeds are treated either as a sale or a return of capital, depending upon the significance of the rights sold.[12]
As illustrated over this series, due to the multitude of options available and the analysis required to determine the best option for a taxpayer, any landowner seeking to participate in a water project should seek legal counsel before committing to any course of action to best structure the transaction to their advantage.
This article is published in The Florida Bar Tax Section Bulletin, Vol. XXXIV, No. 1, Spring 2017.
About the Authors:
Dana M. Apfelbaum practices in the areas of federal income, estate, and gift tax law and family business succession planning. She counsels individuals in estate planning, with an emphasis on implementing the client’s objectives, asset protection and minimizing wealth transfer taxes. Ms. Apfelbaum also represents fiduciaries through all stages of probate, estate and trust administration. In addition, she represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, other general business matters, and succession planning. She may be reached at dapfelbaum@www.deanmead.com.
Brad Gould practices in Dean Mead’s Fort Pierce office located in St. Lucie County, Florida. His practice covers the areas of federal income, estate, and gift tax law and business succession planning. He represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, and other general business matters. Mr. Gould represents individuals, businesses and fiduciaries before the IRS and also counsels clients on estate and wealth preservation planning matters. Additionally, he represents trustees, personal representatives and family members in controversies regarding wills, trusts and estates. Mr. Gould is also a Certified Public Accountant. He may be reached at bgould@www.deanmead.com.
Michael D. Minton is a shareholder and chair of Dean Mead’s Agribusiness Industry Team. He represents family businesses with an emphasis on generationally owned agricultural businesses. Mr. Minton assists with their organizational structure, federal income, estate and gift tax planning, and business succession planning. He is a member of the Solutions Committee of the Central Florida Water Initiative. He may be reached at (772) 464-7700 or by email at mminton@www.deanmead.com.
[1] IRC § 61(a); Rev. Rul. 60-32; Notice 99-3, 1999-1 CB 271; Notice 2006-108, 2006-2 CB 1118; All statutory references to the Internal Revenue Code of 1986 (IRC).
[2] § 1031(a).
[3] Treas. Reg. § 1031(k)-1.
[4] Treas. Reg. § 1031(a)-1(b).
[5] Treas. Reg. § 1.1031(a)-1(c).
[6] Rev. Rul. 72-601, 1972-2 C.B. 467, holding that Treas. Reg. § 1.1031(a)-1(c) also applies to other temporary interests in property.
[7] § 1033(a).
[8] There are no requirements regarding the control of proceeds and a taxpayer may defer gain by purchasing qualifying replacement property within two (2) years (three (3) years when the converted property is real property held for productive use in a trade or business or for investment) after the close of the first taxable year in which any part of the subject gain is realized. §§ 1033(a)(2)(A), 1033(a)(2)(B), 1033(g)(4).
[9] See P.L.R. 200109005; Maloof v. Comr., 65 T.C. 263 (1975); Liant Record, Inc. v. Comr., 303 F.2d 326 (2d Cir. 1962). Additionally, if the property converted is real property held for productive use in a trade or business or for investment, then property “of a like kind to be held either for productive use in a trade or business or for investment” automatically qualifies as similar or related property. § 1033(g).
[10] Treas. Reg. § 1.1033(a)-2(c).
[11] Ordinary income is taxed, for pass-through entities and noncorporate taxpayers (partnerships, S corporations individuals, estates, and trusts), at a rate than can be as high as 39.6%. However, preferential rates apply to long term the net capital gains, ranging from 0% to 23.8%. C corporations do not get a preferential rate for capital gains and are taxed at a rate as high as 38.6% (combined federal and state rates).
[12] Rev. Rul. 59-121, 1959-1 C.B. 212.
