Can You Buy Land with a 1031 Exchange? Rules and Strategies for Real Estate Investors
When investors think of a 1031 Exchange, they often imagine swapping one rental or commercial property for another. But what about raw land?
Can you use a 1031 Exchange to sell an income-producing property and buy land — or vice versa?
The answer is yes, but with some important considerations. Here’s how the IRS views land under Section 1031, and what investors should know before structuring this kind of exchange.
Land Qualifies — But Not All Land Is Treated Equally
Under IRS Section 1031, any real property held for investment or productive use in a trade or business can qualify for a tax-deferred exchange. That includes raw, vacant, or agricultural land — as long as it’s held for investment purposes.
So, yes — you can exchange:
A rental property for raw land
Farmland for a commercial building
One parcel of investment land for another
However, not all land qualifies. Property held primarily for resale — such as land acquired with the intent to develop and sell lots — is considered inventory and does not meet 1031 requirements.
When Buying Land Through a 1031 Exchange Makes Sense
There are several strategic reasons an investor might use a 1031 Exchange to acquire land:
Long-Term Appreciation Play – Investors may prefer to hold land in an area expected to grow in value, deferring taxes while they wait for future development or sale.
Diversification – Exchanging a structure-heavy asset (like an apartment or retail center) for land can reduce management responsibilities.
Development Planning – Some investors buy land with plans to construct an income-producing property later — as long as the intent at purchase is investment, not resale.
Agricultural or Ranch Expansion – Farmers and ranchers often use 1031 Exchanges to consolidate or relocate operations without triggering capital gains taxes.
Common Scenarios: From Buildings to Bare Land — and Back
Example 1: Selling an Apartment, Buying Land
An investor sells a small apartment complex and uses the proceeds to purchase 20 acres of investment land outside a growing metro area. Because the land is being held for appreciation, not for immediate development or resale, the exchange qualifies under IRS rules.
Example 2: Selling Land, Buying an Income Property
Another investor sells a parcel of vacant land held for 10 years and reinvests the proceeds into a retail property. This is also a valid 1031 Exchange, since both are investment-use assets.
IRS Timelines and Process Still Apply
Even when the exchange involves land, all standard 1031 timelines and rules still apply:
Identify replacement property within 45 days of selling the original property.
Close on the replacement property within 180 days.
Use a Qualified Intermediary (QI) to hold exchange funds — you cannot receive the proceeds directly.
The same documentation, identification rules, and exchange agreements required for improved properties apply to land transactions as well.
Important Tax Considerations
When exchanging for or from land, keep in mind:
No depreciation recapture applies to raw land since it’s not depreciable.
If you exchange a depreciated building for land, the deferred depreciation carries forward and will affect future tax calculations.
To maintain full deferral, the value of the replacement land must be equal to or greater than the property sold, and all proceeds must be reinvested.
Failing to meet these conditions can result in a partial exchange — where only part of the gain is deferred, and the rest is taxable (“boot”).
Smart Planning Maximizes Land Exchange Benefits
While land can absolutely qualify for a 1031 Exchange, success depends on intent, structure, and documentation.
Investors should clearly establish that the property — whether acquired or sold — is held for investment, not for short-term resale or personal use.
Working with a Qualified Intermediary and a tax professional ensures that your exchange aligns with IRS expectations and protects your deferral.
Conclusion: From Dirt to Dollars — The Power of a Well-Planned Exchange
Buying or selling land through a 1031 Exchange can be a smart, tax-efficient move for investors who understand the rules. Whether you’re unlocking the value of a long-held parcel or diversifying your portfolio into future development land, the IRS allows flexibility — as long as the investment intent is clear.
With the right strategy and compliance, land isn’t just dirt — it’s an asset that can keep your capital growing, compounding, and tax-deferred.
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or investment advice. Investors should consult with a Qualified Intermediary, CPA, or tax advisor experienced in IRS Section 1031 Exchanges before pursuing a transaction involving land.
