The Income Tax Consequences of Sales of Present Interests and Future Interests: Distinguishing Time from Space

Abstract

An owner of property can divide ownership spacially, by selling all rights to a phyically discrete part of the property, or temporally, by selling a present interest or a future interest. This Article develops a Model illustrating inconsistencies under existing law between the economic and income tax consequences of a temporal division. It also explores the tendency of courts to equate, erroneously, a temporal division to a spacial division. When a temporal division is equated to a spacial division, income deferral will result from a temporal division. The Article develops an analytical framework to remedy the income deferral problem and to resolve, in a manner consistent with economic reality, the many other income tax issues raised by a temporal division. Finally, the Article demonstrates how the foregoing framework can be adapted to deal with the special problems raised when wasting property is the subject of a temporal division.

Keywords: present interest, future interest, remainder interest, joint purchase, temporal division

JEL Classification: E62, H21, H24, K34