Section 1031 generally doesn’t allow you to exchange into improvements on land that you already own because you can’t exchange into something that you already have. Thankfully, there’s a creative workaround for this.
Ground Lease Strategy
A ground lease strategy involves creating a new 30+ year ground lease estate on your land. Instead of owning the land, you lease it to your qualified intermediary’s LLC during construction and 1031 exchange into that leasehold, plus the now existing improvements.
This complex type of 1031 exchange requires a team of experts to successfully execute. Be sure to involve your qualified intermediary, your CPA, and your attorney throughout the exchange.
Case Study
A client recently asked: “can I use 1031 exchange proceeds to build rental storage units on my land?”
With proper planning, we explored a leasehold plus construction structure that could open the door to tax deferral while building new income-producing property built to our client’s exact specifications.
The Process
Establish the Exchange Accommodation Titleholder (EAT).
Create the ground lease and establish a 30+ year leasehold on land you own.
Transfer title to the Exchange Accommodation Titleholder (EAT).
Provide insurance certificate naming you, the bank (if needed), and the Exchange Accommodation Titleholder (EAT) as insured parties under the liability and property coverage.
Construct improvements on the leasehold property.
Complete the 1031 exchange into the leasehold plus improvements.
Final Tax Reporting – Close-Out Letter & IRS filing
CPEC1031, LLC issues a final summary letter documenting key dates and utilization of funds. Then, you’ll report the exchange on IRS form 8821 with your tax professional as part of your federal tax return for the year in which the relinquished property is sold.
Find a Qualified Intermediary to Help with Your 1031 Exchange
Find a qualified intermediary near you to help with your next 1031 exchange of real estate. CPEC1031, LLC offers qualified intermediary services to clients throughout the United States. We have more than two decades of experience working on 1031 exchanges. Let us help you through the details of your next 1031 exchange and make sure you are able to get 100% capital gains tax deferral. You can find us at our main offices, which are located in the heart of downtown Minneapolis.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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