Can You 1031 Exchange Raw Land?

Raw land is one of the easiest property types to 1031 because the like-kind test for real estate is broad. The hard part is not whether land qualifies — it usually does — but whether the IRS will conclude the taxpayer held it for investment rather than for resale.

The Like-Kind Test for Undeveloped Land

Under IRC §1031, two pieces of US real estate are like-kind if both are held for productive use in a trade or business or for investment. The character of the improvement — raw land, a rental house, an apartment building, a strip center, a warehouse — does not affect like-kind status. The Treasury regulations at §1.1031(a)-1(b) confirm this expressly: improved real property and unimproved real property are like-kind.

What that means in practice:

• You can sell a 5-acre lot and buy a rental duplex.
• You can sell a rental duplex and buy 100 acres of farmland.
• You can sell a parcel of timberland and buy a parcel of grazing land.
• You can sell a vacant inner-ring suburban lot and buy oceanfront beachfront land.

None of those swaps stress the like-kind test. The question every QI and CPA ask first is the second one: was the property held for investment?

Intent to Develop vs Intent to Hold (the Dealer Problem)

The 1031 statute carves out property "held primarily for sale" — meaning dealer property, inventory in the hands of someone in the business of buying and selling. Land sits in a fact-pattern that often looks dealer-ish:

• An investor buys raw land, holds it for two years, then sells lots one by one as the area appreciates.
• A developer buys 40 acres, subdivides into 80 lots, and sells lots over five years.
• A flipper buys a tear-down, demolishes it, and sells the bare lot.

In each case, the IRS may treat the land as inventory rather than investment. There is no bright-line test — the analysis comes from a body of case law that looks at factors like:

• How long the property was held (longer holds favor investment treatment).
• Whether the property was advertised, listed, or actively marketed.
• The number of similar transactions the taxpayer has done.
• Whether the taxpayer subdivided, improved, or rezoned the property.
• The ratio of sales activity to other income (full-time real estate operators face a higher bar).
• How the property was reported on past tax returns (Schedule C versus Schedule E or Form 4797).

A taxpayer who held a single parcel for ten years, never marketed it, and reported it on Schedule E (or, if there was no rental, made no entries at all) generally falls on the investment side. A taxpayer who bought, subdivided, and started selling lots within 18 months tends to be on the dealer side.

Timber, Farmland, and Mineral-Rights Land

Specialty land categories qualify under the same rules, with a few wrinkles:

• Farmland. Active farmland held by an investor (rented to a farmer for cash rent or crop share) is straightforward investment property. Farmland actively farmed by the owner is also like-kind to other US real estate, but production assets like livestock, equipment, and growing crops do not exchange under post-TCJA §1031 — only the land itself.
• Timberland. Timber rights are part of the underlying real estate when the trees are not yet cut. A standing-timber sale before exchange complicates things; once timber is severed, it becomes personal property and cannot 1031.
• Mineral rights. Mineral interests — oil, gas, and hard-rock — are real property under most state laws and are like-kind to other US real estate. The IRS has consistently allowed mineral-interest 1031s, including overrides, royalty interests, and working interests in producing wells.
• Conservation easements and partial interests. A conservation easement granted to a qualified holder is generally a charitable deduction event, not an exchange. Partial real-estate interests — remainder interests, term interests, undivided fractional interests — can be 1031-eligible if structured correctly.

Exchange Into Improved Property (a Common Pattern)

The most common land-related 1031 we see is land-to-improved: a long-held vacant parcel sold to a developer, with proceeds rolled into a stabilized rental or commercial building. The pattern is straightforward as a forward exchange:

1. Sell the land. Proceeds go to the QI's segregated escrow.
2. Identify replacement property within 45 days. Standard three-property rule, 200% rule, or 95% rule applies.
3. Close on the replacement within 180 days.

The trap is timing. Land sales often close fast (developers want title), while suitable replacement properties — the kind of stabilized cash-flowing assets a former landowner usually wants — are slower to negotiate and inspect. Investors who sell land and then start hunting frequently run out of clock. The mitigation is to identify replacement candidates before listing the land, or to use a Delaware Statutory Trust as a backstop.

Improvement Exchanges for Building on Raw Land

The opposite pattern — selling improved property and exchanging into raw land where you plan to build — has its own structure: the improvement exchange, also called a build-to-suit exchange.

In a standard forward exchange, only the cost of the land at closing counts toward the replacement value. If you sell a $2M rental and buy a $400K parcel that you plan to develop into a $2.4M building, only $400K is exchanged — the other $1.6M creates boot and is taxable.

An improvement exchange solves this. An Exchange Accommodation Titleholder (EAT) takes title to the parcel, holds it during construction (up to 180 days), and the improvements built during the holding period count toward the replacement value. At the 180-day mark, the EAT transfers the now-improved property to the taxpayer, completing the exchange.

Improvement exchanges are mechanically more complex — they involve a separate accommodating entity, lender approvals, and tighter construction draws — which is why they cost more. Simple 1031 LLC charges $1,500 flat for improvement exchanges; the standard forward exchange is $799. We are a Qualified Intermediary and do not provide tax, legal, or investment advice — the dealer-versus-investment determination on land is a question for your CPA.

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