The short answer
Yes. Owning land subject to a solar or wind lease is fee ownership of real property, so the land can be your relinquished property or your replacement, and the lease simply transfers with it to the buyer. Leasing land to an energy developer is holding it for investment or business use, which is what section 1031 requires. What the exchange cannot reach is the income stream itself: rent and up-front lease bonuses are ordinary income when received, and the developer's panels or turbines belong to the developer unless you buy the facility.
At a glance
| Land under lease | Fee ownership, real property for 1031 |
|---|---|
| Use test | Land leased to a developer is held for investment or business |
| Lease payments | Rent, ordinary income; advance rent taxed in the year received |
| Easements and options | Listed as real property interests in Reg. section 1.1031(a)-3 |
| Turbines and solar arrays | Power generation facilities are listed inherently permanent structures |
| Recapture caution | Facility components can still be section 1245 property for recapture |
| Developer leasehold | A lease with 30 years or more to run is like-kind to fee land |
Land with an energy lease is ordinary real property for exchange purposes
Reg. section 1.1031(a)-3(a)(1) defines real property as land and improvements to land, and paragraph (a)(5) lists fee ownership, a leasehold, an option to acquire real property and an easement as real property interests. Selling the fee subject to a recorded lease is a sale of real property; the buyer takes the land and the landlord's position under the lease.
Section 1031(a)(1) requires that the property be held for productive use in a trade or business or for investment. Land rented to a developer meets that test as plainly as land rented to a farmer. The IRS fact sheet FS-2008-18 adds that 'real property that is improved with a residential rental house is like-kind to vacant land', so leased farmland can be exchanged for a building, a rental, or other land.
Watch the parts you do not hold for investment. A farmhouse you live in on the same tract is personal-use property, and the split is covered in selling part of a parcel.
The lease income stays taxable even though the land can be exchanged
Reg. section 1.61-8 includes rentals for the occupancy of real estate in gross income, and it requires advance rentals to be 'included in income for the year of receipt regardless of the period covered'. A signing bonus or up-front payment under an energy lease is therefore income when received, not sale proceeds that can go to an intermediary. The same paragraph treats a payment for cancelling a lease as income.
A developer's payment for a permanent easement is different in kind, because an easement is a real property interest under paragraph (a)(5). Whether a particular payment is for an easement sold outright or is rent for a term right depends on the grant's terms, so get your CPA's read before treating any developer payment as exchangeable.
If you own the solar or wind facility, it can be real property but recapture still applies
The regulation lists 'power generation and transmission facilities' and 'electric transmission towers' among inherently permanent structures, so an owned array or turbine permanently affixed to land is real property for section 1031. That matters to investors who buy a project, or land plus the facility, as replacement property.
Paragraph (a)(7) then limits the effect: the definition applies 'only for purposes of section 1031', and a structure may still be section 1245 property whose depreciation is recaptured. Equipment depreciated quickly can carry ordinary income on a later sale even inside an exchange.
Developers on the tenant side hold leaseholds. Reg. section 1.1031(a)-1(c) says a leasehold of a fee 'with 30 years or more to run' is like-kind to real estate, which is why long site leases can themselves be exchange property.
Worked example: 160 leased acres sold for $1,600,000
Hypothetical, round figures; run your own numbers with your CPA. You hold 160 acres of farmland with a recorded wind lease. Your adjusted basis is $400,000, and a buyer agrees to pay $1,600,000 for the land subject to the lease.
The $1,200,000 gain can be deferred if the full proceeds go through a qualified intermediary into replacement real property, which could be other land, a building, or interests in a Delaware statutory trust that Rev. Rul. 2004-86 treats as eligible.
Rent you collected before closing, and the prorated rent credited at closing, are income for the year. The buyer's lender will usually review the lease and its decommissioning terms, so give the title company the recorded lease and any amendments early.
- Price: $1,600,000 for the fee subject to the lease.
- Deferred gain if fully reinvested: $1,200,000.
- Rent through closing: ordinary income for the year it is received.
Buying leased land as replacement property is an income decision as much as a tax one
As a replacement, land carrying an energy lease is like-kind to the rental or commercial property you sold, and the rent is your return. Read the lease the way a lender would: term, escalations, assignment rights, the developer's termination options, and who removes the equipment at the end. A lease the developer can end early leaves you with farmland at farmland value.
Related property types with similar issues are water rights and easements, mineral rights and cell tower and billboard ground leases.
Related questions
Does the energy lease make my land 'held for sale' or a business I cannot exchange?
No. Leasing land to a tenant is holding it for investment or business use, which section 1031 requires; held for sale refers to inventory-type property.
Can I sell the land but keep receiving the lease payments?
Rent belongs to the owner of the land, so after the sale the buyer receives it. Keeping the income would require a different structure, such as retaining a defined interest, which changes what you are selling.
Is the developer's signing bonus part of my exchange proceeds?
No. Under Reg. section 1.61-8(b) advance rent is income in the year received, whatever period it covers.
Can I exchange farmland with a solar lease for an apartment building?
Yes. Real property is like-kind to other real property whether improved or unimproved, as long as both are held for business or investment.
Is an option the developer holds on my land a problem?
An option to acquire real property is itself a real property interest, and it passes with the land. Tell your buyer and title company, because it affects price and financing.
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(a)-3, definition of real property (Cornell LII)
- Treas. Reg. Section 1.1031(a)-1, like-kind examples (Cornell LII)
- 26 U.S.C. Section 1031 (Cornell LII)
- Treas. Reg. Section 1.61-8, rents and royalties (Cornell LII)
- IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Section 1031
- Rev. Rul. 2004-86, Internal Revenue Bulletin 2004-33