1031 Exchange Into a Ground Lease (as Landowner)

The fee under a ground lease is ordinary land, and the whole price is land basis

You are buying the land and the landlord's position under the lease. That is fee real estate, like-kind to any U.S. real property under Reg. section 1.1031(a)-1, and it needs no remaining-term test. The 30-year rule applies to the other side: if you bought the tenant's leasehold, it would need 30 or more years to run, counting options, to be like-kind to the fee you sold, which the leasehold interest page covers.

For depreciation the lease does not help. Section 167(c)(2) says that when property is acquired subject to a lease, no part of the basis is allocated to the leasehold interest, and Reg. section 1.167(a)-2 excludes land from depreciation. Your carried-over basis and any new money all sit in land, with no cost segregation and no bonus. The ground rent is still taxed as rent each year, so more of every payment is taxable than with a building you can depreciate.

That has a recapture side. Exchanging a building on which you took bonus or cost-segregation depreciation into land alone can make that recapture taxable with no cash received, because sections 1245(b)(4) and 1250(d)(4) look at the depreciable property you acquire; the raw land page explains the mechanics. Pairing the land with a building or a DST interest fixes it.

Rent coverage is the credit test: the building's income against your ground rent

Safehold, a public REIT that invests only in ground leases, defines ground rent coverage in its 2025 Form 10-K as the property's trailing-twelve-month net operating income divided by the annual ground rent, and targets about 2.0 to 4.5 times. It also targets average remaining initial lease terms of 30 to 99 years.

Get the building's operating statements and the tenant's rent roll before day 45. Hypothetical: an office building earning $300,000 of net operating income on land leased to its owner for $100,000 a year covers the ground rent three times; if the building's income falls by half, coverage drops to 1.5 times and the building still pays you before its owner earns anything. Run your own numbers with your CPA.

The same filing notes that the landlord relies on net operating income as reported by tenants without independent verification. As a single buyer you can do better: make reporting a condition of your purchase, and ask for an estoppel confirming the rent, the term and that no default exists.

Escalators decide whether the rent keeps pace over decades

Ground rent is fixed for long periods, so the escalator is the growth. Safehold reports that its leases provide for fixed or CPI-based increases, or both, and that its CPI lookbacks are generally capped at 3.0% to 3.5% and generally start between years 11 and 21 of the lease.

Read the escalator clause line by line: fixed percentage steps, CPI with a cap and floor, or periodic resets to a percentage of appraised land value. A reset to appraised value can raise rent sharply or invite a dispute, and a long flat period with no escalator gives up purchasing power. The ground lease strategy guide compares those structures and their tax timing.

The tenant's lender holds rights over your land, and you need to know them

Ground leases are financeable because the landlord gives the tenant's lender protections. Safehold's filing lists the usual ones: the leasehold mortgagee receives notices and can cure tenant defaults, can require a new lease with a successor tenant on the same terms, and must consent to certain actions; the filing also warns that a lender may insist on applying casualty insurance proceeds to its loan instead of rebuilding.

Read the mortgagee provisions, the insurance and restoration clause and any subordination language before you identify. Ask whether the fee has been subordinated to the leasehold mortgage; if it has, the tenant's loan is not limited to the building. A ground lease where you can lose rent through a lender's choice about insurance proceeds is not the bond it appears to be.

Tenant options can cap the reversion you are paying for

The reversion is the building that becomes yours when the lease ends or the tenant defaults. Safehold illustrates it this way: if the ground lease costs 35% of the combined property value, the other 65% is potential value that would turn over to the landlord at reversion, assuming no change in value.

Tenant rights can take that away. The same filing describes leases giving a tenant the right to buy the land at fair market value after a casualty, a right to demolish the building, and a buy-out option in year 49. Search your lease for purchase options, rights of first refusal and demolition rights, and value the land as if any of them were exercised.

Before day 45: what to verify on a ground-lease purchase

Request the ground lease with every amendment, the tenant estoppel, the leasehold mortgagee list and recognition agreements, the building's operating statements, an appraisal that values the land both encumbered and unencumbered, and a title commitment showing any subordination. Under the all-appropriate-inquiries rule a Phase I assessment must be done within one year before acquisition, with key components within 180 days.

Reg. section 1.1031(k)-1(c)(4) lets you identify three properties of any value, so name a backup. A direct title security or a traditional DST holding net-leased buildings offers lease income with depreciation, which a ground lease cannot.