How to Defer Taxes on Inherited Land Using a 1031 Exchange
When families pass down land—farmland, vacant acreage, or investment real estate—it often comes with both sentimental value and important tax decisions. One of the most common questions we hear is:
“If I inherit land and want to sell it, can I use a 1031 exchange to defer the taxes?”
The short answer is yes, in many cases you can—and when done correctly, a 1031 exchange can eliminate your tax bill entirely until a future sale. Below, we break down how inherited land is treated for tax purposes and how a 1031 exchange can help you roll your investment into new property without triggering capital gains.
Inherited Land Comes With a Big Tax Benefit: The Step-Up in Basis
When you inherit real estate, the IRS gives you what’s called a step-up in basis. Instead of carrying the original owner’s purchase price (which might be decades old), your tax basis is reset to the fair market value on the date of death.
Example
Your grandparent bought the property for $80,000
It was worth $300,000 on their date of death
Your new basis = $300,000
This reduces or eliminates the gain when you sell. But if the property has appreciated since the date of death—or you want to reinvest the proceeds—this is where a 1031 exchange becomes a powerful tool.
When Does a 1031 Exchange Apply to Inherited Land?
A 1031 exchange allows you to sell investment or business-use real estate and reinvest in other real estate without paying tax today.
Inherited land can qualify if:
It is held for investment,
It is vacant land intended to appreciate,
It is farmland, rented acreage, or any land used for income,
You document investment intent before selling.
You do not need to hold the land for a long period—only long enough to clearly establish investment use.
How a 1031 Exchange Defers Your Taxes
Let’s say you inherited land worth $300,000 and you sell it a year later for $400,000.
Without a 1031 exchange:
You would owe capital gains tax on the $100,000 gain.
With a 1031 exchange:
You reinvest the proceeds into other investment property (land, a rental, farmland, etc.) and defer the entire gain. No tax is due when you sell.
Your basis in the new property becomes:
New property purchase price – deferred gain = new basis
This continues until you sell without exchanging—or until the next generation inherits the property and receives a new step-up in basis (wiping out all prior gains).
This is why many investors call 1031 exchanges the “defer, defer, and die” strategy.
Key Rules You Must Follow
A 1031 exchange is extremely strict. To keep it valid:
1. Use a Qualified Intermediary (QI)
You cannot receive or touch the sale proceeds. A QI holds the funds until you close on the replacement property.
2. 45-Day Identification Deadline
You must identify the replacement property in writing within 45 days of selling the inherited land.
3. 180-Day Closing Deadline
You must close on the new property within 180 days of the sale.
4. Buy “Like-Kind” Property
Real estate to real estate is considered like-kind in almost all cases, including:
Vacant land → farmland
Acreage → rental property
Farm → commercial property
Land → 30-year leasehold interest
Personal-use property does not qualify (no primary residences or vacation homes unless converted to investment use).
When NOT to Use a 1031 Exchange
A 1031 exchange is not always beneficial. Skip the exchange when:
The property sells below its inherited value (you’d want to claim a capital loss)
You plan to cash out rather than reinvest
You prefer a clean break instead of long-term deferral
Your sale is too small to justify intermediary fees
As with any tax strategy, it’s important to have the numbers reviewed first.
Using This Strategy for Farm Families & Landowners
In northern Kentucky and southern Ohio, we see this planning often with:
Family farms passed down through generations
Estate land divided among siblings
Acreage that has appreciated significantly
Clients selling inherited property to purchase income-producing land or rentals
A properly structured 1031 exchange turns a taxable sale into a tax-free rollover, keeping your capital working for you.
Thinking About Selling Inherited Land? We Can Help.
At Baker Business & Tax Services PLLC, we help clients structure 1031 exchanges, analyze inherited property basis, coordinate with qualified intermediaries, and build long-term tax-efficient real estate strategies.
If you want to explore whether a 1031 exchange is right for your situation, reach out to our office and schedule a consultation:
📞 (859) 216-2551
📍 20 N Grand Ave, Suite 6, Ft. Thomas, KY 41075
🌐 www.bakeracct.com
We’ll walk you through the numbers, the rules, and the best match for your long-term financial goals.