Can you buy land with a 1031 exchange?

Question

Is it possible to acquire land as a replacement property in a 1031 exchange, and if so, what are the specific conditions or requirements that must be met for the transaction to qualify under Section 1031 of the Internal Revenue Code?

ARTE's Answer

Yes, you can buy land with a 1031 exchange, provided that the land is considered like-kind to the property you are selling. Under Section 1031 of the Internal Revenue Code, real property held for productive use in a trade or business or for investment can be exchanged for other real property of like-kind, which includes land. The key is that both the relinquished property and the replacement property must be held for investment or business purposes.

The term “like-kind” is quite broad when it comes to real estate. According to IRS guidelines, as long as the properties are of the same nature or character, they are considered like-kind. This means you can exchange a rental property, for example, for a piece of land, as both are considered real property held for investment purposes.

Let’s walk through an example to illustrate how this works, using Deferred.com as your qualified intermediary:

  1. Sale of Relinquished Property: You sell your rental property for $500,000. After accounting for $30,000 in closing costs, you have $470,000 in net proceeds. These proceeds are transferred to Deferred.com, who holds them in escrow.
  2. Identification Period: Within 45 days of selling your rental property, you must identify potential replacement properties. You identify a piece of land valued at $500,000 as your replacement property.
  3. Exchange Period: You have 180 days from the sale of your rental property to close on the purchase of the identified land. Deferred.com uses the $470,000 held in escrow to purchase the land on your behalf. You may need to cover any additional costs or differences in value with your own funds or financing.
  4. Completion of Exchange: Once the land purchase is complete, you have successfully executed a 1031 exchange. By reinvesting the proceeds into like-kind property, you defer the capital gains tax that would have been due on the sale of your rental property.

Using Deferred.com as your qualified intermediary ensures that you comply with IRS regulations, as we handle the exchange funds and documentation, preventing you from having constructive receipt of the proceeds. Our “No Fee Exchange” service further enhances your investment by saving you money on intermediary fees, allowing you to maximize your reinvestment potential.

This example demonstrates how you can effectively use a 1031 exchange to purchase land, leveraging the tax deferral benefits to continue building your investment portfolio. Always consult with a tax professional to ensure compliance with all IRS requirements and to tailor the exchange to your specific financial situation.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

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See more frequently asked questions about 1031 exchanges

How long can you live in a 1031 exchange property after 2 years?
What are the tax implications and requirements for personal use of a property acquired through a 1031 exchange after holding it for the initial 2-year qualifying use period? Specifically, how does personal use affect the property's status for investment purposes, and are there any limitations or considerations to be aware of if I intend to live in the property after the 2-year period?
Does 1031 exchange avoid state taxes?
Does a 1031 exchange allow for the deferral of state-level taxes on capital gains, similar to how it defers federal capital gains taxes, and are there any state-specific considerations or regulations that might affect the tax treatment of a 1031 exchange?
Can 1031 exchange funds be used for closing costs?
Can funds from a 1031 exchange be utilized to cover closing costs associated with the sale of the relinquished property or the purchase of the replacement property, and if so, which specific types of closing costs are permissible without resulting in taxable boot or disqualifying the exchange?
What disqualifies a 1031 exchange?
What are the specific factors or circumstances that can lead to the disqualification of a 1031 exchange, preventing it from receiving tax-deferred treatment under Section 1031 of the Internal Revenue Code?
How soon can you sell a 1031 exchange property?
What is the minimum holding period required before selling a property acquired through a 1031 exchange, while still ensuring compliance with IRS guidelines and maintaining the tax-deferred status of the exchange?