The short answer
Not in the simple way of paying a builder to put an ADU on a relative's lot. Exchange money has to come back to you as real property you own, so you would need either title to a separate parcel or a ground lease that the regulations treat as like-kind to a fee, which means 30 years or more to run. The ADU must also be built before you take title, because Reg. section 1.1031(k)-1(e)(4) says construction after you receive the property is not like-kind property. And because the landowner is family, anything they are paid as part of the exchange is tested under the related-party rules in section 1031(f).
At a glance
| What you must receive | A real property interest in your name: fee title or a qualifying leasehold |
|---|---|
| Leasehold | Like-kind to a fee when it has 30 years or more to run |
| Construction timing | Only work completed before you take title counts |
| Who builds | An exchange accommodation titleholder, within 180 days |
| Family landowner | Related person if a spouse, sibling, parent, child or grandparent, among others |
| IRS position | Related-party leasehold improvement exchanges are still under study |
| Occupancy | A family member living in the ADU is your personal use unless they pay fair rent |
An ADU on land you do not own gives you nothing to receive unless you also get an interest in the land
Paying a contractor for a building on someone else's land buys construction services, and Reg. section 1.1031(k)-1(e)(4) says an exchange of relinquished property for services, including production services, is not within section 1031.
You need a real property interest. Reg. section 1.1031(a)-3 lists fee ownership and a leasehold among the interests that are real property, and Reg. section 1.1031(a)-1(c) gives the example of exchanging real estate for a leasehold of a fee with 30 years or more to run. Publication 544 repeats that a lease running 30 years or longer is like-kind to real estate you own.
So the plan has to deliver either a separate lot deeded to you or a long ground lease from your relative, with the ADU on it.
The only way to spend exchange money on the building is to have someone else own it while it is built
Rev. Proc. 2000-37 lets an exchange accommodation titleholder hold property for up to 180 days, and it permits you to supervise improvement or act as contractor during that time. The titleholder takes the ground lease, builds with funds you advance from the exchange, and transfers the leasehold and the ADU to you by day 180.
Under Reg. section 1.1031(k)-1(e)(3), what you receive counts only to the extent it is completed and is real property under local law. An ADU that is 70% finished at day 180 credits you with the lease and the finished work; unspent money is boot.
Land already in your own name is a different problem, covered in building on land you already own, and construction timing in general is in new construction as replacement property.
A parent or sibling as landowner brings in the related-party rules
Section 1031(f)(3) takes related persons from section 267(b), and the Form 8824 instructions list your spouse, child, grandchild, parent, grandparent, brother and sister. Section 1031(f)(4) denies deferral for any transaction structured to avoid the related-party rules.
In Rev. Rul. 2002-83 a taxpayer lost deferral because a related party received cash for the replacement property through the intermediary. A lump-sum lease premium or a land price paid to your relative out of the exchange invites the same result; buying a lot from family is covered in buying replacement property from a relative.
The IRS has said it is still studying exactly this pattern. Section 2.06 of Rev. Proc. 2004-51 names transactions in which a related person transfers a leasehold in land to an accommodation party that builds improvements and transfers them to the taxpayer. No safe harbor covers it.
Worked example: $300,000 of proceeds and a parent's backyard
Hypothetical, round figures. You sold a rental and have $300,000 with the intermediary and a $200,000 gain. Your parent will grant a 35-year ground lease at fair annual rent, paid over time from the ADU's income rather than up front.
The titleholder takes the lease, spends $280,000 building the ADU and transfers both to you on day 175, with the ADU finished. $20,000 is left unspent and is boot; the rest is deferred if the IRS accepts the structure.
If only $140,000 of finished construction is in place on day 175, the other $160,000 is boot, and $160,000 of the $200,000 gain is taxed. Run your own numbers with your CPA and an exchange attorney.
Who lives in the ADU matters as much as who owns the land
The ADU has to be held for investment. Under section 280A(d)(2), a family member's use counts as your personal use unless they pay fair rent and use it as their main home; see renting to your child or parent.
If the real aim is a home for a relative, a simpler route is to exchange into ordinary rental property or a Delaware Statutory Trust interest, accepted as real property in Rev. Rul. 2004-86, and build the ADU with your own money. Trust interests are illiquid and carry fees and property risk.
If the structure still appeals, have an exchange attorney draft the ground lease, the accommodation agreement and the construction schedule before you sell.
Related questions
Could my parents deed me part of the lot first?
A gifted lot would be land you own before the exchange, and Rev. Proc. 2004-51 says an exchange of your real estate for improvements on land you already own does not qualify. Buying it from them with exchange money raises the Rev. Rul. 2002-83 problem.
Does a ground lease with renewal options count toward 30 years?
The regulation speaks of a leasehold with 30 years or more to run. How renewal options are counted is not settled in the sources above, so a fixed term of 30 years or more is the safer reading.
Can I finish the ADU after I receive it?
Yes, with your own money, but that later work does not count toward the exchange under Reg. section 1.1031(k)-1(e)(4).
Is ground rent paid to my parent over the years a problem?
Ongoing fair rent paid from the property's income is not the cash-out pattern in Rev. Rul. 2002-83, but no ruling addresses this exact case. Have your adviser review the lease terms.
Can an unrelated landowner's lot work the same way?
Yes, and it avoids section 1031(f). The 30-year leasehold, titleholder and 180-day completion rules still apply.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Treas. Reg. Section 1.1031(k)-1, deferred exchanges
- 26 U.S.C. Section 1031
- Treas. Reg. Section 1.1031(a)-3, definition of real property
- Treas. Reg. Section 1.1031(a)-1, property held for productive use or investment
- IRS Publication 544, Sales and Other Dispositions of Assets
- IRS, Rev. Proc. 2000-37, Internal Revenue Bulletin 2000-40
- IRS, Instructions for Form 8824 (2025)
- IRS, Rev. Rul. 2002-83
- IRS, Internal Revenue Bulletin 2004-33 (Rev. Proc. 2004-51 and Rev. Rul. 2004-86)
- 26 U.S.C. Section 280A