Bifurcation creates a disposition most owners never consider and most advisors never raise. The land is sold. That is a taxable event. Whether it can be exchanged, and how the leaseback affects the answer, is the question worth asking before the deal rather than during it.
Tax authorities and bankruptcy courts both look past labels. A purported sale-leaseback that functions as secured lending gets recharacterized, and if it does, there was never a disposition to exchange in the first place.
The facts that push toward a true sale are ordinary and checkable: the buyer pays fair value for the land, the buyer bears real economic risk, rent is market rather than a debt-service equivalent, there is no purchase option at a fixed formula price and no mandatory repurchase, and the buyer can sell, finance and transfer the fee freely.
This is why our form is drafted with express true-lease and anti-recharacterization provisions rather than leaving it to inference. A structure meant to survive a bankruptcy test is usually the same structure that survives a tax one.
The like-kind regulations treat a leasehold with thirty years or more to run as of like kind to a fee interest in real property. A ninety-nine year ground lease clears that line with room to spare.
That has a consequence people miss. The leasehold received is not automatically cash or boot. It is real property. Whether it is treated as property received in the exchange, and how the values are allocated, is exactly the analysis a qualified intermediary is trained to run. See the thirty-year rule for the mechanics.
The cleanest structure is usually the least clever one. The land sale generates proceeds, and those proceeds go into the project, into a different property, or into replacement real estate through an ordinary forward exchange. The leaseback is simply the continuing right to operate, not an attempt to be the replacement property.
That version is easy to explain, easy to document and does not ask a qualified intermediary to take a position on a thin question. It is the one we see chosen most often.
Your basis allocation between land and improvements, because the gain on the land sale is measured against the land basis only. Any depreciation history, because recapture is measured on the improvements you keep, not the land you sell. The draft ground lease, because the true-sale analysis reads the actual covenants. And the settlement timeline, because a forward exchange has a forty-five day identification window and a one hundred eighty day close.
Bring those four and a competent intermediary can answer in one call. Bring a term sheet alone and you will get a maybe.
Yes, it is a disposition of real property. Whether tax is deferred depends on whether an exchange is structured, and that has to be set up before closing, not after.
Not by itself. A leasehold with thirty years or more to run is like-kind real property. The analysis is about characterization and allocation, and it belongs to your qualified intermediary and CPA.
Fair value paid, real risk transferred, market rent, no fixed-price repurchase option, and a buyer free to sell or finance the fee. Our form says so expressly.
Yes, and this is the most common route. The leaseback is the right to keep operating, not the replacement property.
Against the basis allocated to land. Owners are frequently surprised by how low that allocation is on an older property, which is exactly why the exchange question matters.
Recapture applies to depreciated improvements. Land was never depreciable. You keep the improvements in a bifurcation, so the land sale itself does not trigger improvement recapture.
Before closing. An exchange cannot be created retroactively once you have received the proceeds.
Send stabilized NOI and total project cost or purchase price and we will price the land. Bring your qualified intermediary in at the same time and the tax question gets settled while the economics are still moving.
Email us the property