Land Sale Exchange Math: The Simpler Numbers When There Is No Depreciation

No depreciation means no 25% layer, so the rate depends only on where the gain stacks

A building sale has a depreciation layer taxed up to 25% under section 1(h). Land has none, because land cannot be depreciated. Its gain is simply the amount realized less what you paid and any capitalized costs such as surveys, assessments or improvements.

Investment land is a capital asset under section 1221. Land used in your trade or business, such as farmland you work or a lot used by your own business, is section 1231 property instead. Net section 1231 gain is taxed as long-term capital gain, except that section 1231(c) treats it as ordinary income to the extent of net section 1231 losses deducted in the five preceding years.

Check whether anything on the land was depreciated. Publication 946 lists improvements made directly to land, such as fences, roads, sidewalks and shrubbery, as 15-year property. If you depreciated a well, fencing or drainage, that portion brings a depreciation layer back into the sale.

Worked model: a $1,000,000 land gain at two income levels

Hypothetical: a couple filing jointly bought 40 acres in 2005 for $300,000 and sells in 2026 for $1,350,000, paying $50,000 of costs. The amount realized is $1,300,000 and the gain is $1,000,000. Figures use the 2026 breakpoints in Rev. Proc. 2025-32 and assume MAGI equals taxable income.

Couple A has $450,000 of other taxable income. $163,700 of the gain fills the rest of the 15% band, costing $24,555, and $836,300 is taxed at 20%, costing $167,260. Net investment income tax adds $38,000. Federal total: $229,815, or 23% of the gain.

Couple B, retired, has $60,000 of other taxable income. $38,900 of the gain falls in the 0% band, $514,800 at 15% costs $77,220, and $446,300 at 20% costs $89,260. The surtax applies to the $810,000 by which MAGI exceeds $250,000, adding $30,780. Federal total: $197,260. A hypothetical 5% state tax would add $50,000 for either couple. Run your own numbers with your CPA.

• Couple A: $24,555 + $167,260 + $38,000 = $229,815 federal.
• Couple B: $0 + $77,220 + $89,260 + $30,780 = $197,260 federal.
• A rental with the same $1,000,000 gain, $400,000 of it depreciation, would cost Couple A $258,000.

Exchanging land into a building is like-kind, but the building starts from the land's basis

Reg. section 1.1031(a)-1(c) gives the exchange of improved real estate for unimproved real estate as an example of like-kind property, so land can be exchanged for an apartment building, a warehouse, farmland or a DST interest. Section 1031(a)(2) excludes real property held primarily for sale, which is the risk for owners who subdivide and sell lots.

Exchange Couple A's land into a $1,300,000 rental with no added money, and section 1031(d) gives the replacement the land's $300,000 basis. If 75% of that is allocated to the building, about $225,000 is depreciable, roughly $8,182 a year over 27.5 years, against about $35,455 for a buyer who paid $975,000 in cash for the same building.

Borrowing on the replacement adds basis dollar for dollar, which is the usual way to restore depreciation. Depreciating the replacement shows how new money is scheduled.

What the deferral is worth on land: the full $1,300,000 keeps working instead of $1,070,185

Selling leaves Couple A $1,070,185 after federal tax, before any state tax. Exchanging keeps all $1,300,000 invested, so the deferral is worth the income on $229,815 for as long as the replacement is held, and the whole $229,815 if the property is held until death and passes with a stepped-up basis under section 1014.

The price of that deferral is the smaller depreciation described above and a $300,000 basis that follows you into every later exchange. For Couple B, whose bill is lower, the gap between selling and exchanging is narrower, and the 0% band rewards spreading sales across years if the land can be sold in parcels without becoming property held for sale.

The comparison is laid out for all three paths in exchange, opportunity zone or pay the tax.

Which replacement fits a landowner depends on whether you want income, management or neither

Land often produces little income, so an exchange is frequently the moment an owner starts collecting rent. A building brings management and repairs; a single-tenant net-leased property brings less of both; a Delaware statutory trust interest brings none, with the trade-offs of illiquidity and no say in the trust's decisions. Rev. Rul. 2004-86 treats a DST interest as real property for section 1031.

Owners who want to stay in land can exchange farmland for farmland or for ranch land; exchanging farmland and raw land and lots cover those markets. Building on land you already own is a different transaction, covered in building on land you already own.

A land seller whose basis is high relative to price has another option. Because only the gain must be invested in a qualified opportunity fund, not the full proceeds, a sale with a small gain can fit the opportunity zone rules better than an exchange; Public Law 119-21 made those rules permanent with a rolling five-year deferral for investments after December 31, 2026.