1031 Exchanges & Cell Tower Easements: How Do They Work?
As we’ve discussed in our article about cell tower lease or sale, many cellular developers lease land and rooftops from property owners to install their cellular equipment. In exchange, property owners receive rent payments from the cellular company for a designated amount of time (usually 20 years), which can provide property owners with a substantial amount of income.
A cell tower lease can represent a huge financial opportunity for the landowner. A 1031 exchange is one example of how a cell tower lease can be turned into a more flexible asset, with potentially more long-term value than accumulated rent over time. While not typically associated with a cell tower lease buyout, the sale of a cell tower easement can qualify for a 1031 exchange.
Cell Tower Lease Buyout or Sale
Before diving into the details of a 1031 exchange, we should quickly recap what a cell tower lease buyout entails. A cell tower lease buyout (or monetization) is a transaction between the lease owner and a company (like Landmark Dividend) that acquires ground leases. In exchange for the lease, the property owner receives a significant lump sum cash payment.
Below are a few of the reasons why a landowner might be interested in selling their cell tower lease:
1: Pay off debt
2: Expand their business
3: Make a real estate investment
4: Pay for college
5: Reduce Risk
Selling your cell tower lease is not without tax consequence. Typically, the proceeds from a cell lease buyout are taxed as capital gains. However, there is potentially a way to defer taxes on the sale. The answer is a 1031 exchange.
What is a 1031 Exchange?
According to Internal Revenue Code section 1031, investors can sell a property and defer all taxes so long as the proceeds are invested in a “like-kind” property or asset. The property you are buying must be an investment property or a commercial enterprise. For an asset to qualify, there are some further 1031 exchange rules that must be followed. First, a qualified intermediary (QI) must handle the proceeds from the sale; otherwise, the proceeds will be taxable. Additionally, a like-kind property must be identified within 45 days of the sale, and the sale must be concluded within 180 days.
What is a Cell Easement?
But wait, what does this have to do with cell tower leases and buyouts?
If a cell tower lease buyout is structured in such a way that a cell easement is placed under the cell tower site, the cell tower lease sale is turned into a real property sale. A cell easement is just like any other kind of easement: it’s a legal agreement between two parties (in this case, a landowner and a wireless carrier) for the rights to use the land for a specific purpose. Most easements are perpetual, meaning that they run with the land (in California, a perpetual easement lasts for 99 years), though, fixed assignments for cell towers are not entirely unheard of.
Wai-Yew Lam, TREC instructor & Qualified Intermediary
1031 exchange accommodator language spoken in English and Chinese
wlam@adelphiretirement.com
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