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Washington Tax Alert December 31, 2008 - Term Interest in Real Estate

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com

December 31, 2008

The IRS National Office recently issued a private letter ruling to a taxpayer that purchased an estate for years, or a term interest, in mixed-use commercial real estate. Simultaneously, the sellers of the property sold a remainder interest in the property to another party. See PLR 200852013.

The acquired property included rental apartment buildings, buildings containing retail space, a parking garage, a surface parking lot, and the land underlying the project. The Service ruled that the taxpayer could amortize the portion of its acquisition cost of the term interest allocable to the land over the term of the interest. In addition, the Service ruled that the taxpayer could depreciate the portion of its acquisition cost of the term interest allocable to the buildings and land improvements under IRC § 168. The key to the favorable ruling was that the taxpayer and the purchaser of the remainder interest in the property were unrelated to each other, and unrelated to the sellers.