FINAL TAX-EXEMPT LEASING REGS RETAIN 'REPLACEMENT LEASE' RULES.

The IRS has published final regulations (T.D. 8667) under section 168(h) relating to the lease term of tax-exempt property. T.D. 8667 also provides guidance regarding like-kind exchanges among related parties involving tax-exempt use property. The final regs adopt with revisions the proposed regs (IA-18-95) published on April 21, 1995.

Tangible property (other than nonresidential real property) leased to a tax-exempt entity is "tax-exempt use property" under section 168(h)(1)(A). Tax-exempt use property must be depreciated under the alternative depreciation system described in section 168(g). Tax-exempt use property subject to a lease must be depreciated using the straight-line method over a period equal to the greater of the property's class life or 125 percent of the lease term.

The final regs retain the provisions in the proposed regs regarding "replacement leases." The final regs thus include in the lease term an additional time period if the lessee or a related person has agreed that one or both of them will or could be obligated to make a rent payment on the tax-exempt property during the additional period. The rules also clarify that if property is subject to more than one lease (including any sublease) entered into as part of a single transaction, the lease term will include all periods described in one or more of the leases.

The final regs adopt without revision the provisions of the proposed regs regarding like-kind exchanges.

The definition of lease term in the final regs is generally applicable to leases entered into on or after April 20, 1995. The treatment of like-kind exchanges applies to transfers made on or after April 20, 1995.

FULL TEXT: 61 F.R. 18675-18678; Doc 96-12766 (4 pages)