Exchanging Appreciated Land Into Income-Producing Property

Land is like-kind to any US income property, as long as you held it for investment and not for sale

Reg. section 1.1031(a)-1(b) says whether real estate is improved or unimproved goes only to grade or quality, not kind, and paragraph (c) gives exchanging unimproved for improved real estate as an example. The same paragraph says unproductive land held by a non-dealer for future use or appreciation is held for investment.

The trap is section 1031(a)(2), which excludes real property held primarily for sale. If you have platted lots, put in roads, or marketed parcels to builders, the IRS can treat you as a developer selling inventory. If that describes your plans, see developer sales and 1031 options before you sign a contract.

Farmland and ranch acreage follow the same rule; farmland exchanges and raw land and lots cover what is specific to selling each.

With no depreciation to recapture, a cash sale is all capital gain, and the size of the gain is the problem

Publication 946 is direct: you cannot depreciate land because it does not wear out, become obsolete or get used up. So a land sale has no unrecaptured section 1250 layer at up to 25%. Every dollar of long-term gain falls into the 0%, 15% and 20% brackets of section 1(h), with the 3.8% net investment income tax on top once modified AGI passes $250,000 joint or $200,000 single.

That sounds simpler than a rental sale, and it is. But land bought decades ago at a fraction of today's value produces a gain close to the whole sale price, and a single year of that gain pushes most owners well into the 20% bracket, which for 2026 starts above $613,700 of taxable income for joint filers under Rev. Proc. 2025-32.

Worked model: $1,100,000 of land with a $100,000 basis carries $195,855 of federal tax

Hypothetical round numbers for a married couple filing jointly, before any state tax. Your own figures will differ; run your own numbers with your CPA.

• Sale price $1,100,000, selling costs $50,000, amount realized $1,050,000. Basis $100,000. Gain $950,000, all long-term capital gain.
• The couple has $100,000 of other taxable income, so the 0% band is already used. Gain from $100,000 to $613,700 is taxed at 15%: $513,700 × 15% = $77,055. The remaining $436,300 is taxed at 20%: $87,260.
• Their modified AGI before the sale is $130,000, so after the sale it is $1,080,000. That exceeds $250,000 by $830,000, less than the gain, so NIIT is 3.8% × $830,000 = $31,540.
• Federal total $195,855 is the figure to compare against an exchange. If they exchange the full $1,050,000 into income property instead, none of it is due now, and the whole amount stays invested and earning.

Your low land basis follows you, so the new building's depreciation is much smaller than you expect

Under section 1031(d) the replacement takes the basis of what you gave up, adjusted for cash and debt. In the example, a $1,050,000 replacement bought with no new debt has a basis of $100,000, not $1,050,000.

That basis then has to be split between the replacement's land and building. Publication 551 allocates a lump-sum basis by relative fair market value, and its condemnation example applies the same split when unimproved land is replaced with land and buildings. If the building is 80% of the value, $80,000 becomes depreciable: about $2,051 a year over 39 years for a commercial building, or $2,909 over 27.5 years for a residential rental under section 168(c).

Adding a loan raises basis. If the couple buys $2,000,000 of property with $950,000 of new debt, the basis becomes $1,050,000 and the deductions grow with it. That is one reason land owners with no mortgage often use some leverage in the replacement, whether directly or through a leveraged DST.

Land closings run on the buyer's schedule, so plan the identification before the 45 days start

Land buyers, especially developers, often negotiate long escrows with entitlement and permitting contingencies, then close on short notice. The 45-day identification period and 180-day exchange period in Reg. section 1.1031(k)-1 start on the day the land transfers, regardless of how long the contract took.

Use the contract period to shortlist replacements, and identify enough to survive a lost deal: three properties of any value, or any number up to 200% of the land's value. If you find the income property first, a reverse exchange under Rev. Proc. 2000-37 lets an accommodation titleholder hold it until the land sells; see the reverse exchange guide.

If the buyer wants you to carry a note, the note is not like-kind property and is taxed as boot unless it is handled inside the exchange; carrying a note for the buyer explains the options.

Income DSTs and net-leased buildings are the usual landing spots for a land seller who wants no management

Most land sellers have never been landlords, and many do not want to start. A traditional DST interest is real property for exchange purposes under Rev. Rul. 2004-86, comes with financing already in place and property management handled by the sponsor, and lets one sale spread across several properties. Distributions are not guaranteed, interests are illiquid, and the sponsor, not you, decides when the property sells.

Our traditional DST offerings typically take $100,000 to $250,000 per trust and can close quickly when a land deal leaves little time. For a single property in your own name, a direct title security puts a triple-net-leased single-family rental in your own single-member LLC. If tax is the bigger question than income, bonus depreciation funds are a separate route to offset the gain.