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
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 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
- 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
- There will be one overall plan of finance for the development of the
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
- 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).