Rev. Proc. 2004-51: The Irs Strikes Back

22 Pages Posted: 9 Jul 2005


Perhaps the most controversial income tax question in the real estate industry in 2004 was whether a seller of real estate could use Section 1031 proceeds to construct a new building on land already controlled by that taxpayer. In an earlier major development for the U.S. real estate industry, the IRS, in PLR 200251008, favorably permitted a reinvestment of exchange proceeds into the cost of a new building built on land leased from the seller's affiliate. In Rev. Proc. 2004-51, however, the IRS indicated that it was considering reversing its position so as to no longer permit the outcome in PLR 200251008.

In Rev. Proc. 2004-51, the IRS further announced that it would not permit tax-free reinvestment in the more common situation where the land on which the new building will be constructed is already owned by the same legal entity that is reinvesting. Rev. Proc. 2004-51 relied on Rev. Rul. 67-255, which held that buildings constructed on land already owned by the taxpayer are not like kind to real estate exchanged by the taxpayer.

In this article the authors criticize, on technical and policy grounds, the IRS's application of Rev. Rul. 67-255 in Rev. Proc. 2004-51 to prevent the exchange of real estate for a building to be built on land already owned by the taxpayer and the IRS's possible extension of Rev. Proc. 2004-51 to discontinue the approach allowed in PLR 200251008. The authors suggest that to avoid the application of Rev. Proc. 2004-51, taxpayers with multiple properties should place each parcel of real estate in a separate legal entity.

Keywords: section 1031, like-kind exchange, improvements exchange

Suggested Citation

Alton, Kelly E. and Borden, Bradley T. and Lederman, Alan S., Rev. Proc. 2004-51: The Irs Strikes Back. Taxes - The Tax Magazine, Vol. 83, No. 2, pp. 17-28, February 2005, Available at SSRN:

Kelly E. Alton

NES Financial ( email )

50 West San Fernando Street
Suite 300
San Jose, CA 95113
United States
4083670828 (Phone)

Bradley T. Borden (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States


Alan S. Lederman

Akerman, Senterfitt ( email )

One Southeast Third Avenue
25th Floor
Miami, FL 33131-1714
United States

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