In a private letter ruling (PLR), the IRS ruled that three buildings may be treated as a single building for purposes of determining whether the building (and its structural components) is residential rental property or non-residential rental property under Section 168(e)(2) of the Internal Revenue Code (Code).
The IRS further ruled that, if the three buildings are treated as a single building for purposes of determining whether the building (and its structural components) is residential rental property or non-residential rental property under Section 168(e)(2), then the partnership that owns the buildings qualifies as a “qualified business” under Section 45D(d)(3) of the Code.
The facts in the PLR involve a taxpayer that owns three buildings (one of which is a parking garage) it plans to develop into a mixed-use project (residential and commercial). One building and the parking garage are contiguous. The third building, separated by a public street, will be connected to the other two buildings by an enclosed skywalk above the public street.
The PLR cites as authority for treating more than one building as a single building § 1.1250-1(a)(2) and former § 1.167(j)-3(b)(1)(ii) of the Income Tax Regulations. Under these provisions, more than one building may be treated as a single building when they are on a single tract of land or parcel (or contiguous tracts or parcels), and they are operated as a single integrated unit.
The relevant facts for determining whether the buildings are operated as a single unit are the actual operation, management, financing, and accounting for the buildings. The facts in the PLR supporting treating the three buildings as one include:
- One building and the parking garage are contiguous, and the other building is separated only by a public street.
- A single architect served as the site plan architect for the project, and created designs and drawings of all three buildings as one development.
- The integration of the buildings with interior pathways and the skywalk will provide for the seamless movement of residents and commercial tenants of the project among the three buildings of the project.
- Residential and commercial tenants will be given priority in leasing parking spaces at a slight discount from market rent, and parking will be included as part of their rent.
- One parking space in the parking garage will be dedicated to each residential unit in the other buildings.
- The parking garage will contain an emergency generator that supports the entire project, as well as the project’s storage space and maintenance facility.
- The three buildings will be renovated and placed in service within the same one-year period.
- The three buildings will be owned by the same taxpayer and marketed as a single, mixed-use development.
- There will be a single management company for the entire project that will manage the three buildings as one building/property for all purposes (including a comprehensive management plan, accounting system, annual budget, monthly accounting package, and program of preventative maintenance procedures).
- There will be one overall plan of finance for the development of the project.
The project will be the sole business activity of the partnership that will own it. For the partnership to qualify as a “qualified active low-income community business” for purposes of the new markets tax credit, the project must be a “qualified business” in a low-income community. The rental of real property qualifies as a qualified business, but only if the rental property is not residential rental property. By treating the three buildings as a single building, the residential rental property test under Section 168(e)(2)(A)(ii) is applied on a project basis, not on a building-by-building basis, for purposes of determining whether the project is a qualified business.
As with all private letter rulings, it is directed only to the taxpayer requesting it, and may not be used or cited as precedent. Moreover, the PLR is limited to its facts, and makes clear that no opinion is expressed or implied on:
- Whether the buildings composing the project are non-residential real property or residential real property for any taxable year under Section 168(e)(2) (i.e., for depreciation purposes).
- What components of such buildings are Section 1245 property (as defined in Section 1245(a)(3)).
- Whether any of the buildings composing the project qualify for the rehabilitation credit under Section 47 (including whether such buildings may be treated as a single building under Section 47).