How 1031 Exchanges on Raw Land Work

Author: Sara Koivu.

The TL;DR Version:

1031 exchanges on raw land are possible for investors who are looking to defer capital gains. Like with all 1031 exchanges on investment property, the vacant land must be held for investment or business purposes. However, the exchange proceeds can be used to purchase any other qualifying investment property, not just raw land.

Can You Do a 1031 Exchange On Raw Land?

Picture this: an investor owns a plot of vacant land outside a growing metropolitan area. Now, they’ve kept the land leased instead of developing it for personal use, which has allowed them to generate an additional income stream. But as the metro area creeps closer to their land land, the value has increased, opening up an opportunity for them to capitalize on the gains and move their money to a new investment property.

In many cases, the investor may not be aware that a 1031 exchange on the vacant land is even a possibility. However, raw and vacant land can qualify for a 1031 exchange when held for investment or business use. This makes early guidance on the process especially important.

Here are the top points you need to understand.

What Counts as “Vacant Land”?

Let’s first establish what constitutes raw or vacant land. Generally, “vacant land” means real property with no substantial structures. This includes homes, commercial buildings, and any significant developments.

So, how could it have been seen as “investment property”? The investor might have leased it for grazing, farming, storage, or even billboard placements. In other cases, they may have held it simply for long-term appreciation. These lots can sit at the edge of an expanding suburb, in rural acreage across the country, or infill lots that are waiting for a new buyer or zoning change. The common thread is the absence of structure and a simpler ownership history than with improvement properties.

Because a 1031 exchange on raw land involves property that generally isn’t depreciable, depreciation recapture typically isn’t an issue, unlike with improved investment property.

1031 exchanges on vacant land carry the same core question as any other exchange: was the property held for investment or business purposes? Considering this before listing the property is always worth discussing.

When Does Vacant or Raw Land Qualify for a 1031 Exchange?

Any vacant or raw land held for investment or productive use in a business may qualify for a “like-kind” 1031 exchange.

How the Land Was Held and Likely 1031 Treatment

This can get a bit complicated. If the land was held primarily for resale, a 1031 may not be possible. Let’s say the investor subdivided their land into lots, actively marketed it for resale, or treated it more as inventory rather than a true investment. In those scenarios, the vacant land may be viewed as dealer property, which does not qualify for 1031 treatment.

The distinction between investment vs. dealer property is common in any 1031 exchange of raw land. It also may not be obvious to an investor from the outside looking in. As a result, any hint of subdivision or active marketing-for-resale plans should be treated as signals to involve a tax advisor early in the process instead of after the listing goes live.

Holding period is another related question investors may face when it comes to 1031 exchanges on vacant land. While there is no fixed statutory holding requirement, a longer holding period can support investment intent more clearly than a short-term hold. This is particularly true if the raw land was originally acquired with a quick resale in mind.

What Can You Exchange Raw Land For?

A major benefit of 1031 exchanges on raw land for investors is that the replacement property does not have to be more vacant land. While the Tax Cuts and Jobs Act limited Section 1031 to real property beginning in 2018, “like-kind” is still interpreted broadly as long as the replacement property is also held for investment.

So, if an investor successfully exchanges vacant land, they could reinvest the exchange proceeds on real property held for investment or business purposes. If an investor is focused on trading vacant land for vacant land, it may be worth considering the broader range of qualifying replacement properties.

Replacement Property Options for a Land Exchange

It’s worth discussing what type of investment property is most valuable to exchange to. But keep in mind, any form of primary residence or property held for short-term flipping would not qualify.

How Does a 1031 Exchange on Vacant Land Work?

1031 exchanges on raw land follow the same cadence as any other exchange, with some subtle differences around how land-based transactions flow. It all starts with the investor planning the sale of their land.

Before the sale officially closes, a Qualified Intermediary steps in to hold the proceeds. Because the investor cannot receive any of the sale funds directly, this step is crucial to defer capital gains. The investor is then on two running clocks:

1. They must identify a replacement property within 45 days, providing their options in writing.

2. From there, they have until the earlier of 180 days after the sale or their tax return due date, including extensions, to complete the purchase of their target replacement property.

During land-for-land exchanges specifically, the identification window can feel tight if the investor is comparing raw parcels of land against improved ones. Scouting potential replacement properties ahead of time is one of the most practical ways to keep a 1031 exchange of vacant land on track.

What Should Investors Keep Their Eyes On During 1031 Exchanges of Raw Land?

With land exchanges, a few things separate a smooth transaction from a stalled one. Investors should be aware of timing and structural issues before they become problems. Here are five things to keep in mind:

1. Involve a QI Early in the Process: If proceeds from the sale hit the investor's bank account, any 1031 exchange is likely off the table. A QI should be involved before the sale closes, and exchange cooperation language can be included in the transaction documents.

2. Always Watch the Clock: Investors must hit the 45- and 180-day windows to complete a 1031 exchange of raw land. Important to remember: those timelines don't pause for land searches, which can move at a slower pace than searches for improved property in an active market.

3. Keep Boot in Mind: If there's a mortgage on the land being paid off at closing, the investor may end up with boot: cash or debt relief that doesn't carry over into the replacement property and can become taxable. This is a conversation for a QI and a tax advisor.

4. Flag Related-Party Situations: If the land has been leased to a family member or an entity the investor controls, or if the replacement property might come from a related party, the related-party rules and their holding-period requirements need a closer look before the deal is structured.

5. Keep Vesting Consistent: The taxpayer who sells the relinquished land generally needs to be the same taxpayer who takes title to the replacement property. If the investor holds the land in an LLC, a trust, or jointly with a spouse, that same-taxpayer structure should carry through the whole transaction, and it's worth confirming with a QI and an attorney before drafting any purchase agreement.

Mistakes During 1031 Exchanges of Vacant Land

When navigating 1031 exchanges of raw land, a few mistakes pop up more frequently than with other property types. The first is treating long-held land as automatically eligible. Why can this get investors in trouble? Subdivision or resale activity needs to be taken into account.

The second is assuming the replacement property has to be the same level of “raw” as the relinquished property. The broader like-kind standards open the investor up to more income-producing alternatives.

Underestimating how long a land search can take is a third. Improved investment properties in active markets tend to have more inventory and faster diligence; a comparable parcel of raw land in the right location may simply take longer to find, which puts real pressure on the 45-day identification window if the search starts late.

Finally, waiting until after a purchase agreement is signed to loop in a QI remains one of the fastest ways to lose the exchange altogether, land deals included. Waiting until late in the sale process to involve a QI or introduce the exchange can create avoidable complications.

Why Choosing the Right Qualified Intermediary Matters for 1031 Exchanges on Vacant Land

When dealing with land exchanges, the QI you choose is critical. The QI plays a critical role in a deferred 1031 exchange by helping structure the exchange and holding exchange proceeds so the taxpayer does not take actual or constructive receipt. Factors such as how exchange funds are held and protected, the QI’s financial controls and insurance coverage, and the financial strength of its parent organization can all be important considerations when choosing a QI. For land transactions, investors may also need to discuss reverse and improvement exchange structures when timing or condition of the replacement property require a different approach.

If you’d like to learn more about your options, contact our team today.

First American Exchange Company facilitates 1031 exchanges and can provide practical process information, but does not provide tax or legal advice. Investors should consult their independent tax and legal advisors regarding their specific transaction.

FAQs

Does vacant land qualify for a 1031 exchange?

Raw land held for investment or business use, such as leased land, generally may qualify for a 1031 exchange. Land held primarily for resale, such as subdivided lots actively marketed to buyers, is typically treated as dealer property and does not qualify.

Can raw land be exchanged for something other than more land?

Yes. Section 1031 generally allows qualifying U.S. real property held for investment or business use to be exchanged for other “like-kind” real property, including rental homes, commercial buildings, multifamily properties, and additional raw land.

What is dealer property, and why does it matter for land exchanges?

Dealer property is real estate held primarily for resale rather than investment, such as subdivided lots marketed to buyers. Dealer property does not qualify for a 1031 exchange, which makes investment intent, not just how long the land was held, a key question for any land sale.

Is there a required holding period for land before a 1031 exchange?

The tax code doesn't set a fixed holding period, but a longer hold generally supports investment intent more clearly than a short one. The key question is whether the land was held for investment or business use rather than primarily for resale.

What happens if there's a mortgage on the land being sold?

Paying off debt at closing can affect the taxable portion of an exchange, particularly if the taxpayer does not replace that debt or add sufficient cash to the replacement property. A Qualified Intermediary and tax advisor should review the numbers early.

When should a Qualified Intermediary be brought into the deal?

A qualified intermediary should be involved before the sale closes and ideally, before the property is listed. Once the sale closes, the exchange may no longer be possible. Early QI involvement can also help identify timing or structural issues before they become harder to address.

Can leased land use a 1031 exchange?

Land that has been leased for income generally demonstrates the investment or business-use intent a 1031 exchange requires. This is one of the clearer scenarios for a land exchange, provided the lease reflects genuine investment use rather than a step toward resale.

Does a 1031 exchange on land involve depreciation recapture?

Raw land itself generally isn't depreciable, so depreciation recapture typically isn’t an issue in a 1031 exchange on land. That differs from improved investment property, where prior depreciation may affect tax treatment.

What if the land was leased to a family member?

Related-party transactions are subject to additional rules, including holding-period requirements in certain situations. This should be flagged early so the investor's tax and legal advisors can evaluate the specific facts.

Who should be looped in before listing land for a possible exchange?

A Qualified Intermediary and the client's tax and legal advisors should all be part of the conversation before the listing goes live. Coordinating early keeps the exchange structure intact, protects the 45/180-day timeline, and avoids surprises once the sale closes.