The short answer
Section 1031 asks how you hold the property, for investment or for use in a business, not what your tenant sells, so a building leased to a state-licensed cannabis operator can be relinquished or acquired in an exchange like any other real property. What differs is the market around it: federal drug law makes many banks reluctant to lend, buyers are concentrated among specialty REITs, and the tenant's own tax position under section 280E affects its ability to pay rent. A DEA rule effective April 28, 2026 moved marijuana handled under a state medical license into Schedule III, while adult-use marijuana remains in Schedule I pending a separate rescheduling proceeding.
At a glance
| Exchange test | How you hold the real property, not the tenant's business |
|---|---|
| Section 280E | Bars deductions for a business trafficking in Schedule I or II substances |
| April 28, 2026 DEA rule | State medical marijuana licensees moved to Schedule III; DEA says 280E no longer applies to them |
| Adult-use marijuana | Still Schedule I; DEA hearing on general rescheduling set for June 29 to July 15, 2026 |
| Landlord exposure | Federal law makes it unlawful to knowingly lease a place for unlawful drug manufacture or distribution |
| Bank lending | FinCEN 2014 guidance requires suspicious activity reports on marijuana-related accounts |
| Largest specialty buyer | One REIT owns 111 properties, 8.9 million square feet in 19 states |
The exchange depends on how you hold the building, so a cannabis tenant does not disqualify it
Section 1031(a)(1) defers gain on real property held for productive use in a trade or business or for investment that is exchanged for like-kind real property held the same way. The test looks at your holding purpose. A landlord collecting rent under a long-term lease holds the building for investment whether the tenant runs a pharmacy or a dispensary.
What counts as real property follows Treas. Reg. section 1.1031(a)-3. Grow-room humidity control, high-capacity electrical service, plumbing and security systems integrated into the building are listed structural components. Removable grow lights, benching and extraction equipment are personal property under the regulation's factors. The state cannabis license itself is a license to operate a business, which the regulation says is never real property, so if you are an owner-operator selling the license with the building, only the real estate share of the price goes to your intermediary.
Innovative Industrial Properties' 2025 Form 10-K describes the same split from the buyer's side. Its cultivation buildings have shells similar to light industrial buildings or greenhouses, with capital improvements such as enhanced HVAC for climate and humidity control, high-capacity electrical and plumbing, specialized lighting and building management and security systems.
Section 280E is the tenant's tax problem, and the 2026 DEA rule changed it for medical licensees
Section 280E disallows every deduction and credit of a trade or business that consists of trafficking in Schedule I or II controlled substances prohibited by federal or state law. That rule hits the operator's income statement, and with it the rent coverage a buyer underwrites, rather than your exchange.
On April 28, 2026 the Justice Department published a final rule placing FDA-approved marijuana products and marijuana subject to a state medical marijuana license in Schedule III, effective that day. The rule states that, as a consequence, state medical licensees will no longer be subject to 280E, while adding that it is not a determination of federal tax liability and that other marijuana remains in Schedule I.
For adult-use marijuana, DEA published a notice of hearing on the broader proposal to move it to Schedule III, set to run from June 29 to no later than July 15, 2026. For your sale, the useful question is which license your tenant holds: a medical-only tenant's after-tax cash flow improved this year, while an adult-use tenant remains under 280E until a final rule says otherwise.
Lenders, title and buyers price federal law, so the buyer pool is narrow
Federal statutes still frame the risk. 21 U.S.C. 856 makes it unlawful to knowingly lease or make available a place for unlawfully manufacturing, storing or distributing a controlled substance, with fines up to $2,000,000 for an entity, and 21 U.S.C. 881(a)(7) subjects real property used to facilitate a violation to forfeiture. Those statutes are why many institutional lenders, insurers and buyers decline the asset class regardless of state law.
Banks that do serve the sector follow FinCEN's 2014 guidance, which states that the obligation to file suspicious activity reports on marijuana-related businesses is unaffected by state legalization. NewLake Capital Partners' 2025 Form 10-K describes the banking industry's general reluctance to finance owners of cannabis facilities, which is the opening its 34 properties, leased to 11 tenants with parent or affiliate guarantees, were built on.
The result is a short buyer list: specialty REITs that buy through sale-leasebacks and third-party purchases, private buyers paying cash, and, where the lease grants one, the tenant under a purchase option. A seller who needs the buyer to close within a set window should confirm the buyer's financing early, because your 45-day and 180-day periods start when your sale closes.
Replacement options when you want out of the sector
Most landlords exchanging out of cannabis property are trading concentrated regulatory risk for diversification. A traditional DST holding net-leased, multifamily or industrial property removes both the tenant-license question and the management, and Rev. Rul. 2004-86 explains the limits on what the trustee can do. The DST asset classes overview compares the sectors.
If the building carries a loan from a specialty lender, the replacement must carry equal or greater debt or you add cash; a cash-out DST is designed for high-leverage replacement. If the building is owned free and clear, there is no debt to replace, and an unlevered trust or a direct title security, which puts you on title to individual single-family rentals through your own LLC, are both workable.
Hypothetical: a cultivation building bought for $4,000,000, with $1,000,000 of depreciation taken, sells for $6,000,000 to a specialty REIT. The $3,000,000 gain defers in full if the $6,000,000 goes into replacement property with no cash taken out. Run your own numbers with your CPA.
Buying a cannabis-tenanted building as replacement property: license, lease and financing before day 45
Confirm the tenant's state license class and status first: medical, adult-use or both, the license holder's name, and whether the license is tied to this address. A tenant that loses its license usually cannot operate, so the lease's default and transfer clauses matter more than in a typical net lease.
Read the lease and the guarantor. NewLake's filing says its leases include a parent or affiliate guarantee, and the REIT filings above describe triple-net terms; ask for the guarantor's financial statements and for the tenant's rent coverage under its current 280E position. A specialized grow facility will not re-lease to a conventional industrial tenant at the same rent.
Plan to close without bank debt unless a lender has signed a term sheet, since the replacement debt test still applies. Ask your title company early what exceptions it will take for the tenant's use, and name a non-cannabis backup under the three-property rule in Treas. Reg. section 1.1031(k)-1(c)(4) in case financing or title fails.
Related questions
Can the IRS deny my exchange because the tenant sells cannabis?
Section 1031 asks whether you held the property for investment or business use and received like-kind real property; it does not mention the tenant's business. We found no IRS guidance that denies an exchange on that ground.
Does section 280E apply to me as the landlord?
Section 280E applies to a trade or business that consists of trafficking in Schedule I or II substances, which describes the operator. Whether any part of a landlord's activity could be reached depends on facts, so have your CPA review your lease terms.
Did the 2026 rescheduling rule make all cannabis legal federally?
No. The April 28, 2026 rule moved FDA-approved products and marijuana under a state medical license to Schedule III; other marijuana remains in Schedule I while DEA completes a separate rescheduling proceeding.
Can I sell the building to my tenant and still do a 1031?
Yes. A sale to an unrelated tenant under a purchase option is an ordinary sale for exchange purposes, provided the proceeds go to a qualified intermediary and not to you.
Will a DST buy my cannabis building?
We have not verified any DST offering that holds cannabis-tenanted property; the buyers that describe the sector in public filings are specialty REITs. DSTs are the more common replacement, not the buyer.
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.
- IRC section 1031, Exchange of real property held for productive use or investment
- Treas. Reg. section 1.1031(a)-3, Definition of real property
- IRC section 280E, Expenditures in connection with the illegal sale of drugs
- DEA final rule, Rescheduling of FDA-approved products containing marijuana and state medical marijuana to schedule III (Apr 28, 2026)
- DEA notice of hearing, Rescheduling of Marijuana (Apr 28, 2026)
- 21 U.S.C. 856, Maintaining drug-involved premises
- 21 U.S.C. 881, Forfeitures
- FinCEN, FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses
- Treas. Reg. section 1.1031(k)-1, Deferred exchanges
- Rev. Rul. 2004-86
- Innovative Industrial Properties, Form 10-K for 2025
- NewLake Capital Partners, Form 10-K for 2025