The short answer
You cannot exchange into an equity stake in a developer's venture: an LLC or partnership interest is not real property for section 1031, and anything built to be sold, such as condominium units or lots, is excluded as property held primarily for sale. What can work is taking title to real estate yourself, either as fee or tenancy-in-common owner beside the developer, as the owner of land you ground-lease to the developer, or through an improvement exchange in which an accommodation titleholder holds the site while the developer builds. In the improvement route, only construction finished before the property is deeded to you counts toward your exchange.
At a glance
| JV or LLC interest | Not real property for section 1031, whatever state law calls it |
|---|---|
| For-sale product | Real property held primarily for sale is excluded from section 1031 |
| Co-owning with the developer | Possible as tenants in common if activity stays customary rental activity |
| Leasehold as replacement | A leasehold with 30 years or more to run is like-kind to fee real estate |
| Improvement exchange window | 180 days in the accommodation titleholder's hands, inside your exchange period |
| Construction after you take title | Not like-kind property received in the exchange |
| Land you already own | Outside the parking safe harbor if owned within 180 days before the transfer |
A membership interest in the developer's venture is not like-kind to the property you sold
Reg. section 1.1031(a)-3(a)(5) lists interests in a partnership, stock and other securities among intangibles that are not real property for section 1031, regardless of state law. A developer's offer of a 50% LLC interest in exchange for your proceeds is therefore a taxable purchase of a partnership interest, and the money leaving your intermediary to fund it is boot. The same rule blocks exchanging into a syndication or fund interest.
The section 761(a) election that lets some co-owned property be treated as owned directly does not rescue a development venture. Reg. section 1.761-2 allows it only for an organization availed of for investment purposes and not for the active conduct of a business, which a construction and lease-up project is not.
The product also matters. Section 1031(a)(2) says the rule does not apply to real property held primarily for sale, so a venture that builds condominiums or subdivides lots to sell cannot be replacement property for anyone in it, even an owner on title.
Co-owning beside the developer works only if the arrangement stays a co-ownership, not a partnership
You can take a deeded undivided interest in the project while the developer holds the rest. Rev. Proc. 2002-22, the IRS's advance-ruling checklist for co-ownerships, shows where that breaks down: co-owners' activities must be limited to those customary for rental real property, and the activities of a sponsor or lessee who is also a co-owner are counted. Development, construction and leasing campaigns go beyond that.
Economics break it too. The checklist requires every co-owner to share revenues, costs and debt in proportion to its undivided interest, and bars rents based on net income or increases in equity. A developer's promote, a preferred return to you or a split of sale profit that differs from ownership percentages looks like a partnership.
Exchanging into fee title and contributing it to the venture afterward is also risky. Magneson v. Commissioner allowed a contribution to a partnership only where the partnership's purpose was to hold the property for investment and its assets were predominantly like-kind real estate, which excludes a build-to-sell venture.
Ground lease: exchange into the land and let the developer build on it
The cleanest split often gives you the dirt and the developer the building. You acquire the site as replacement property and sign a long ground lease with the developer, who finances and builds the improvements on its own account and pays you rent. Land is like-kind to a building, because Reg. section 1.1031(a)-1(b) treats improved and unimproved real estate as differing only in grade or quality.
If the developer owns the land and offers you the leasehold instead, Reg. section 1.1031(a)-1(c) treats a leasehold of a fee with 30 years or more to run as like-kind to real estate. Our ground lease 1031 strategy guide covers lease terms, reversion of the improvements and how the rent is valued.
The ground lease keeps you out of the venture's economics. You own real estate, collect rent fixed by the lease and hold the reversion; the developer carries construction risk and its own lenders. If the developer instead wants you to share in its profit, the arrangement moves back toward the partnership problem described above.
Improvement exchange: an accommodation titleholder holds the site while the developer builds, and only finished work counts
Under Rev. Proc. 2000-37, an exchange accommodation titleholder that is not you or a disqualified person can hold title for up to 180 days, and you or a related party may supervise the improvements or act as contractor. The developer can build under contract with the titleholder, which then deeds the land and completed work to you as replacement property.
Reg. section 1.1031(k)-1(e) sets the counting rule. You identify the land by legal description with as much construction detail as is practical, and the property received counts only to the extent of the land and construction completed when you take title; work done after that is not like-kind property. Exchange funds the titleholder has not spent come back to you as boot.
Rev. Proc. 2004-51 closes one door: the safe harbor does not apply to replacement property you owned within the 180 days before the titleholder took title, so you cannot park your own lot and build on it; see building on land you already own. The improvement exchange guide covers the full sequence.
Worked model: why the developer's LLC offer fails and a build-to-suit can work
Hypothetical round numbers. You sell an apartment building and have $1,800,000 with your intermediary and no debt to replace. The developer proposes that you invest it for a 50% interest in an LLC that will build a medical office building. That is a purchase of a partnership interest, and the full $1,800,000 is boot.
The alternative: an accommodation titleholder buys an $800,000 site with your exchange funds, contracts with the developer to build, and on day 170 deeds you the land plus $1,000,000 of completed construction. You received $1,800,000 of like-kind property and defer fully, then lease the building to its tenant.
If only $600,000 of construction is complete on the day you take title, you have received $1,400,000 of qualifying property, and the $400,000 left unspent is boot. You can identify a backup, such as DST interests, in the same 45-day identification as long as the list stays within the three-property or 200 percent limits of Reg. section 1.1031(k)-1(c)(4). Run your own numbers with your CPA.
Related questions
Can I exchange into a preferred equity position in the developer's project?
No. Preferred equity is an interest in an entity, which Reg. section 1.1031(a)-3 excludes from real property. It can be a good investment, but it is a taxable use of your proceeds.
Can the developer act as the accommodation titleholder?
Rev. Proc. 2000-37 requires a titleholder that is neither you nor a disqualified person. The developer can be your contractor and supervise the work, but title should sit with an independent titleholder.
Can I sell my land to the developer's venture and keep a share of the profit?
A share of profit tied to the venture is not real property, so it is boot or a separate investment. If you want to stay in the deal, keep title to the land and ground-lease it.
What happens if construction runs past day 180?
The titleholder must deed the property to you by day 180 under Rev. Proc. 2000-37, and only work completed by then counts. Later construction is yours to fund outside the exchange and adds to your basis.
Is a developer's build-to-suit for a single tenant like-kind?
Yes, if you take title to the land and completed improvements as described above and hold them for investment. The tenant's lease affects value, not like-kind status.
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.
- 26 U.S.C. section 1031, like-kind exchanges
- Reg. section 1.1031(a)-1, property held for productive use or investment
- Reg. section 1.1031(a)-3, definition of real property
- Reg. section 1.1031(k)-1, treatment of deferred exchanges
- Reg. section 1.761-2, exclusion of certain unincorporated organizations
- IRS, Rev. Proc. 2002-22, undivided fractional interests in rental real property
- IRS, Internal Revenue Bulletin 2000-40 (Rev. Proc. 2000-37, qualified exchange accommodation arrangements)
- IRS, Internal Revenue Bulletin 2004-33 (Rev. Proc. 2004-51)
- Magneson v. Commissioner, 753 F.2d 1490 (9th Cir. 1985)