Exchange of Timberland by a REIT
The number of property sales that a real estate investment trust (REIT) can make is restricted to prevent them from engaging in ordinary retailing activities such as sales of lots in a development. In Private Letter Ruling 200728037 [not to be cited as precedent, Code Sec. 6110(k)(3)] the IRS concluded that an exchange of timberland for timberland by a REIT did not constitute a sale for purposes of Code Sec. 857(b)(6)(D)(iv). This conclusion is based on taxpayer's representations that (1) the exchange will be treated as a Code Sec. 1031(a), (2) no gain or loss will be recognized as a result of Code Sec. 1031(a), and (3) the exchange will satisfy the requirements for deferred exchanges under Sec. 1.1031(k)-1 of the Income Tax Regulations. The conclusion also referred to the intent of Congress to allow REIT's a safe harbor within which to adjust their real estate holdings.
Editorial Comment: Should this ruling hold up generally it will provide timberland REIT's with the ability to adjust their holdings for reasons of economic efficiency and economies of scale, however, the Sec. 1031 requirement to carryover the basis of the relinquished property to the replacement property will not increase depletion allowance.