The short answer
Yes. Land holding sand, gravel or stone that has not been extracted is real property under the exchange regulations, so a quarry or gravel pit can be sold into a 1031 exchange, whether you lease it to a producer or work it yourself. Material already mined and stockpiled, crushing and screening equipment, and the operating business are not real property and are taxed when sold. Past depletion and mine development deductions can come back as ordinary income under section 1254, and a reclamation reserve or bond has to be dealt with in the contract.
At a glance
| Unmined sand, gravel and stone | Real property as mines and natural deposits until extracted |
|---|---|
| Stockpiles and mined material | No longer real property; sold outside the exchange |
| Quarry equipment | Asset class 10.0 mining and quarrying: 7-year GDS, 10-year ADS |
| Percentage depletion | 5% of gross income for gravel, sand and most stone, capped at 50% of taxable income from the property |
| Section 1254 recapture | Depletion that reduced basis plus deducted development costs, as ordinary income |
| Recapture inside a 1031 | Figured under rules similar to section 1245, per the Form 8824 instructions |
| Reclamation reserve election | Section 468 reserve is brought into income when the reserve property is disposed of |
Royalty owner or operator: what you own decides what you can exchange
Most pits are owned by a landowner and worked by an aggregate company under a lease that pays a royalty per ton. Under Reg. section 1.611-1(b), a person who invested in the mineral in place and looks to extraction income for a return of capital holds an economic interest and claims depletion. Selling the land subject to that lease is a sale of real property and, if the royalty runs with the land, of the income stream that goes with it.
An operator sells more. The land and deposit, the scale house, shop and office buildings, and paved haul roads are real property. Crushers, screens, conveyors, loaders and trucks are equipment, which Publication 946 places in asset class 10.0 for mining and quarrying of sand, gravel, stone and clay, with a 7-year GDS life; their gain is section 1245 ordinary income to the extent of depreciation. Customer contracts and goodwill are intangibles taxed outside the exchange.
Royalty-only interests split off from the land, such as a term royalty or production payment, follow the duration and state-law tests on our mineral rights page. This page assumes you own the land with the deposit.
Gravel in the ground is real property; the stockpile and the operating permit are not
Reg. section 1.1031(a)-3(a)(3) treats mines and other natural deposits as real property and says ores and minerals stop being real property when they are extracted. Reserves still in the face go through the exchange; washed sand and crushed stone in stockpiles are inventory, and their price is paid outside the intermediary.
The same regulation says a license or permit to engage in or operate a business on real property is not real property, while one solely for the use or occupation of land can be. A state mining or reclamation permit is issued to the operator to run the pit, so treat its value as part of the business, not the land, unless your counsel concludes otherwise under that test.
Write the allocation into the contract: land and reserves, buildings and roads, equipment, stockpiles and goodwill. Only the first two lines go to the qualified intermediary.
Depletion and development costs can return as ordinary income under section 1254
Section 613(b)(6) sets percentage depletion at 5% of gross income for gravel, sand and most stone, and section 613(a) limits it to 50% of taxable income from the property. Section 1254 treats as ordinary income, on a disposition, the lesser of the gain and the total of depletion that reduced the property's basis and mine development or exploration costs deducted under sections 616 or 617.
An exchange does not erase that layer. The Form 8824 instructions say section 1254 recapture in an exchange follows rules similar to section 1245, whose cap is the gain recognized plus the fair market value of property received that is not of the same recapture class. Exchanging a depleted pit into a building or a DST can therefore produce ordinary income with no cash taken out.
Hypothetical: an operator took $300,000 of cost depletion that reduced basis and deducted $200,000 of development costs, then exchanges the pit into $4,000,000 of apartment property. Up to $500,000 could be ordinary income in the year of the exchange, while the rest of the gain is deferred. Percentage depletion taken after basis reached zero did not reduce basis and is not in the section 1254 amount; run your own numbers with your CPA.
Reclamation obligations need a line in the contract and a look at your tax reserve
An operator usually owes reclamation under a state permit and posts a bond. The buyer will either replace the bond and take over the obligation or price the cost into the deal. A cash bond the regulator releases to you is your own deposit coming back, not proceeds of the real estate, so keep it out of the intermediary account and ask your CPA how it is reported.
If you elected a reclamation reserve under section 468, qualified costs are those incurred under a reclamation plan required by the federal surface mining act or a substantially similar state law, and section 468(a)(5) requires a proper inclusion in income on the disposition of any portion of the reserve property. That inclusion is ordinary income in the year of sale, separate from the exchange.
When the buyer assumes liabilities, the Form 8824 instructions count net liabilities assumed by the other party as boot on line 15, offset by liabilities you take on in the replacement. Whether a contingent reclamation obligation counts as a liability for that test is a question to settle with your CPA before closing.
Replacement options, and buying a pit or quarry as replacement property
Royalty income rises and falls with construction volumes, so many landowners exchange into steadier rent: net-leased buildings, rental property or a traditional DST. Another mineral property that is section 1254 property can keep that recapture layer deferred; have your CPA compare the two before you identify. A cash-out DST can carry debt for operators replacing a large payoff.
If you are buying a pit or a royalty-producing tract as replacement, underwrite the reserves first: a drilling or engineering report on tons in place and quality, the remaining permitted area, and zoning for continued extraction. Read the lease for the per-ton royalty, minimum annual royalty, escalation, term and the producer's reclamation duty, and get the producer's royalty statements for several years.
Buying an operating pit means buying a business, so equipment and stockpiles are paid outside the exchange and you inherit reclamation. Reg. section 1.1031(k)-1 gives you 45 days to identify up to three properties or more within 200% of the value sold; a reserve report rarely arrives in that window unless you order it the day your own sale goes under contract.
Related questions
I lease my land to a gravel company. Can I exchange the land with the lease in place?
Yes. The land and the unmined deposit are real property, and a sale subject to the lease is a sale of real property. The buyer steps into the lease and its royalty.
Is the royalty I receive capital gain or ordinary income?
For sand, gravel and stone, royalties are ordinary income subject to depletion, because you keep an economic interest in the deposit. The capital-gain rule in section 631(c) covers only coal and domestic iron ore.
Can stockpiled material be included in the exchange?
No. Under the real property regulation, minerals stop being real property once extracted, so stockpiles are sold for taxable proceeds outside the intermediary.
Will the buyer's assumption of reclamation be treated as cash to me?
Net liabilities the buyer assumes are boot on Form 8824 line 15. Whether a contingent reclamation duty is such a liability depends on its terms, so settle the treatment with your CPA before closing.
Is my quarry like-kind to an apartment building?
Yes. All U.S. real property held for business or investment is like-kind; the separate question is the section 1254 recapture that a building replacement can trigger.
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.
- Treas. Reg. section 1.1031(a)-3, Definition of real property
- Treas. Reg. section 1.611-1, Allowance of deduction for depletion (economic interest)
- IRS Publication 946, How To Depreciate Property (Table B-2 asset classes)
- IRC section 613, Percentage depletion
- IRC section 1254, Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
- IRS, Instructions for Form 8824 (2025)
- IRC section 1245, Gain from dispositions of certain depreciable property
- IRC section 468, Special rules for mining and solid waste reclamation and closing costs
- IRC section 616, Development expenditures
- IRC section 631, Gain or loss in the case of timber, coal, or domestic iron ore
- Treas. Reg. section 1.1031(k)-1, Treatment of deferred exchanges