As we've discussed in our article about Cell Tower Leases, 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
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:
- Pay off debt
- Expand their business
- Make a real estate investment
- Pay for college
- 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.
There are three like kind exchange rules which can help you better define identify a qualifying 1031 transaction:
- The Three Property Rule
- The 200% Rule
- The 95% Rule
Under this rule, a taxpayer can identify one, two, or three properties and acquire one, two, or all three, regardless of the property's fair market value.
If more than 3 properties are identified, the 200% rule allows taxpayers to identify unlimited replacement properties so long as their cumulative value doesn't exceed 200% of the value of the property sold.
This rule lets an investor ignore the other rules for naming property (the Three-Property Rule and the 200% Rule) and name any number of potential replacement property of any value. But when it comes to closing on this replacement property (or properties), you must buy 95% of the aggregate value of the properties you name.
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.
Making Smart Investments
With a cell easement in place, you are now able to proceed with a 1031 exchange and can avoid capital gains tax on your transaction, so long as the funds are into a like-kind property.
So what’s the benefit? The benefit is that property owners have a larger sum to invest, since the amount you can spend is not reduced by taxes.
However, this does not mean that you don’t ever have to pay taxes; instead, the taxes are just deferred until you ultimately sell your new property and cash out.
Contact Landmark Dividend
If you’d like to learn about our Unit Exchange Program, 1031s, or about cell tower lease buyouts, please call us today at 1-800-843-2024 or click here to submit your information. There is never a cost or obligation to speak with us. We’re here to provide you with straightforward information to help you make the best possible financial decision regarding your cell tower lease.
IMPORTANT TAX NOTICE: Landmark does not provide advice on any income tax, capital gains tax or other tax requirements or issues related to any transaction in which Landmark is a party or participant in any fashion. Use of any information obtained from Landmark or its affiliates or agents or referral by Landmark or its affiliates or agents is for general information only and does not represent tax advice either expressed or implied. You are encouraged to seek professional tax advice for tax questions and assistance. The information above is provided as a general introduction to the 1031 exchange process. Prospective sellers and buyers of real estate should always consult their attorney and tax advisor prior to entering into a 1031 transaction.