Rezoning Upside: Sell Now or Rezone First, and What It Does to Your Exchange

The exchange depends on why you hold the land, and rezoning can change the answer

Section 1031(a)(2) says the exchange rule "shall not apply to any exchange of real property held primarily for sale." Reg. section 1.1031(a)-1(b) gives landowners their best sentence: "Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale."

Holding land for years while its value rises is investing. Seeking a rezoning so the land sells for more is still consistent with that, because the increase is realized in one sale. The question shifts when you start doing what a developer does: subdividing, building roads and utilities, marketing lots and selling them to many buyers over time.

If the land is held primarily for sale, you lose more than the exchange. Section 453(b)(2) excludes dealer dispositions of real property from the installment method, the gain is ordinary income, and section 1402(a)(3)(C) excludes gain from self-employment income only for property that is not held primarily for sale to customers.

Courts weigh seven factors, and the number and size of sales count most

In Bramblett v. Commissioner (5th Cir. 1992), the court listed the factors used to decide whether land is held for sale: the purpose of acquisition and length of ownership; efforts to sell; "the number, extent, continuity and substantiality of the sales"; "the extent of subdividing, developing, and advertising to increase sales"; use of a business office; supervision of anyone selling for you; and time devoted to sales. It called frequency and substantiality of sales "the most important factor."

That ranking helps an owner who rezones and sells once. A single substantial sale after a rezoning is a different pattern from five years of lot closings, even if the rezoning took real effort.

Bramblett also shows a structure some families use. A partnership held the land for investment and sold it to a corporation owned by the same people, which developed and sold it. The court held the corporation's development activity could not be attributed to the partnership, so the partnership's gain was capital gain. The Tax Court had ruled the other way first, and the outcome turned on specific facts, so treat it as a planning conversation with counsel, not a template.

What the uplift costs in tax depends on which side of the line you land on

As an investor, gain on land held more than one year is long-term capital gain. For 2026, Rev. Proc. 2025-32 puts the start of the 20% rate at $613,700 of taxable income for joint filers and $545,500 for single filers, and the 3.8% net investment income tax applies above $250,000 and $200,000 of modified AGI. A full exchange defers all of it.

As a dealer, the same gain is ordinary income at rates up to 37%, it cannot be spread with an installment note, and it may carry self-employment tax. The exchange is not available at all.

The rezoning costs themselves are not lost either way. IRS Publication 551 lists zoning costs among the items that increase the basis of property, so engineering, application and legal costs of the rezoning reduce the gain when you sell.

Worked example: sell at $2,000,000 now, or rezone for two years and sell at $3,500,000

These figures are hypothetical. A family has held 40 acres for 25 years with a $500,000 basis. A builder offers $2,000,000 today. A land planner estimates $3,500,000 after a two-year rezoning costing $250,000, with no guarantee of approval.

• Sell now: $1,500,000 of gain, exchangeable in full; the exchange starts on the closing date this year.
• Rezone, then sell the whole tract once: basis rises to $750,000, gain is about $2,750,000, and a single sale by a long-term holder still fits the investment regulation, so it can be exchanged.
• Rezone, subdivide, improve and sell lots over five years: the pattern looks like a business, the gain may be ordinary income with no exchange and no installment reporting, and the extra profit has to cover that risk.
• Rezoning denied: two years and $250,000 spent, and the as-is price may have moved either way. Run your own numbers with your CPA and land-use counsel.

Timing the rezoning against the exchange calendar

A rezoning application does not start any exchange clock; the 45 and 180 days run from the day the land transfers. That means you can rezone at your own pace, but the replacement plan should be ready when approval arrives, because buyers of entitled land often move quickly.

If you sign with a developer subject to the rezoning, the developer may take on the application and control the closing date. Selling land to a developer on a long escrow covers how that affects the clock, and developer sale options covers subdivision and the section 1237 safe harbor.

Entitled land is often sold for a large lump sum that a family does not want to put back into raw land. Interests in Delaware statutory trusts qualify as replacement property under Rev. Rul. 2004-86, and traditional DST exchanges can receive the proceeds on whatever date approval and closing land. DSTs are illiquid and carry sponsor and tenant risk.