The short answer
A leasehold with 30 or more years left to run on the day you transfer it, counting optional renewal periods, is like-kind to a fee interest under Reg. §1.1031(a)-1(c), so it can be exchanged for any U.S. real estate, including a net-leased building or a DST interest. A shorter leasehold is still real property under Reg. §1.1031(a)-3 but is not like-kind to a fee, and its sale is taxable. Improvements built on land you already own, or parked on a related party's ground lease, run into the limits in Rev. Proc. 2004-51.
At a glance
| The 30-year line | Reg. §1.1031(a)-1(c): a leasehold of a fee with 30 years or more to run ↔ real estate |
|---|---|
| Renewal options count | Rev. Rul. 78-72 and Century Electric (25-year lease plus 10-year periods), per Peabody |
| Measured when | Remaining term on the date of the exchange, per TD 9935 preamble and Peabody |
| Sale-leaseback as exchange | Century Electric, 192 F.2d 155 (8th Cir. 1951): fee for 95-year leaseback, loss disallowed |
| Under 30 years | Real property (§1.1031(a)-3) but not equivalent to a fee; sale is taxable |
| Improvements on your own land | Not like-kind: DeCleene, restated in Rev. Proc. 2004-51 §2.05 |
| Parking rule | Rev. Proc. 2004-51: no QEAA safe harbor if you owned the property in the prior 180 days |
Thirty years left on the day of the exchange, counting renewal options you hold
Treas. Reg. §1.1031(a)-1(c) gives, as an example of a like-kind exchange, a taxpayer who 'exchanges a leasehold of a fee with 30 years or more to run for real estate', and Publication 544 (2025) restates it: 'The exchange of real estate you own for a real estate lease that runs 30 years or longer is a like-kind exchange.' The same publication says a life estate expected to last less than 30 years is not like-kind to a remainder interest.
The term is measured when you transfer, and options you can exercise are added. In Peabody, 126 T.C. 261 (2006), the Tax Court described Century Electric as adding 'subsequent 10-year periods' to 'the initial term of a 25-year lease' to satisfy the safe harbor, and it cited Rev. Rul. 78-72 as allowing 'the addition of optional renewal periods to determine whether a leasehold interest was for 30 years or more.'
Hypothetical: a ground lease with 22 years remaining plus two 10-year tenant renewal options counts as 42 years and qualifies. The same lease with no options fails, and a 99-year lease signed in 1955 has 28 years left in 2026 and fails unless an option is added before closing.
Fee for leasehold and leasehold for fee both qualify, which is the sale-leaseback trap
In Century Electric Co. v. Commissioner, 192 F.2d 155 (8th Cir. 1951), a manufacturer deeded its foundry to a college for $150,000 and took back a 95-year lease on the same building, then claimed a loss of $381,710.97 on the 'sale'. The court read the deed and the lease as a single exchange of a fee for a like-kind leasehold, disallowed the loss, and let the company recover it only as depreciation over the 95-year term.
The rule cuts both ways. A tenant on a long city ground lease can sell the leasehold and buy a fee-simple building, and a fee owner can sell and take back or buy a leasehold estate with 30 or more years; Crichton's statement that §1031 draws no distinction between parcels of real property 'however dissimilar' applies to the estate as much as to the dirt.
Hypothetical: you hold a 60-year ground lease on a downtown parcel and own the building you constructed on it. You sell the leasehold and building for $3,000,000 through a qualified intermediary and acquire a $3,000,000 fee-simple single-tenant net-leased property or a DST interest, deferring the entire gain if you also replace any leasehold mortgage that was paid off.
Under 30 years: still real property, no longer like-kind, so the sale is taxed
The preamble to TD 9935 separates the two questions: duration 'is not relevant in determining whether the easement or leasehold is real property' under §1.1031(a)-3(a)(5), but 'may be relevant under §1.1031(a)-1(c)' to whether the exchange is like-kind, and the regulations 'do not address whether exchanged properties are of like kind.' A 20-year leasehold is therefore real property that cannot be swapped for a fee without tax.
The Tax Court has said for decades that 'a short-term leasehold of real property is not equivalent to a fee interest for purposes of sec. 1031', collecting Capri, May Department Stores and Standard Envelope in Peabody, and Wiechens refused to treat even a 50-year water right as a leasehold of 30 years or more. Nothing in the 2020 regulations changed that line.
The planning move is to fix the term before you list. A 25-year remaining term with one 10-year option added by amendment becomes a 35-year leasehold on the exchange date; a landlord who will not grant the option has just told you the sale will be taxable.
Buying a ground-leased replacement: the ground lessor, the lender and the QI
A leasehold can be your replacement property if it has 30 or more years to run including options. The qualified intermediary safe harbor requires your rights under the purchase agreement to be assigned to the QI with every party notified in writing on or before the transfer, the mechanism PLR 200649028 applied under Reg. §1.1031(k)-1(g)(4)(v), so the ground lessor is a party you must bring in before closing rather than after.
Ground-lessor consents and estoppels take time, and your 45-day identification and 180-day closing windows keep running while you wait; identify a fee-simple backup, such as a DST, in case the lessor is slow. Debt relieved when you sell your leasehold counts as money received under Reg. §1.1031(d)-2, so new leasehold financing or cash must replace it on the way in.
Leasehold improvement exchanges: the 180-day ownership rule and related-party land
An improvement exchange parks the replacement with an exchange accommodation titleholder under Rev. Proc. 2000-37, which builds during the exchange period and then conveys the improved property to you. Rev. Proc. 2004-51 withdrew the safe harbor for 'replacement property held in a QEAA if the property is owned by the taxpayer within the 180-day period ending on the date of transfer' to the titleholder, effective for transfers on or after July 20, 2004.
The same procedure restates the older rule that 'an exchange of real estate owned by a taxpayer for improvements on land owned by the same taxpayer does not meet the requirements of §1031', citing DeCleene and Bloomington Coca-Cola, and it says the IRS is 'continuing to study' transactions in which 'a person related to the taxpayer transfers a leasehold in land to an accommodation party' that builds and hands you the leasehold with improvements.
The version the IRS did not flag uses a ground lease from an unrelated owner: the titleholder takes a leasehold of 30 or more years, constructs the building with exchange funds, and conveys the leasehold and improvements to you within 180 days. Improvement exchanges are outlined with the other structures on exchange types; confirm any related-party ground lease with your tax attorney before the titleholder takes title.
Related questions
Do extensions the landlord can refuse count toward the 30 years?
Peabody describes Rev. Rul. 78-72 as counting 'optional renewal periods', meaning options the tenant can exercise. An extension that depends on the landlord's future agreement is not an option you hold, so do not count it without written advice.
Can I exchange a long-term leasehold into a DST?
Yes. Under Rev. Rul. 2004-86 a DST beneficial interest is treated as an undivided interest in the trust's real estate, which is like-kind to a leasehold of 30 or more years, and the trust's fixed-term structure also fits sellers who want no management.
I am the ground lessor under a 99-year lease. Can I exchange my fee?
Yes. In Koch, discussed in Peabody, the Tax Court held that fee land subject to 99-year condominium leases was still like-kind to other fee land and that the leases were not boot, because the rental stream is part of the bundle of rights in the fee.
What about improvements I built on a lease with 15 years left?
The leasehold estate is under 30 years, so it is not like-kind to a fee, and the improvements go with the estate. Selling that package is taxable unless the term is extended past 30 years, including options, before the exchange date.
Is a 30-year lease on land outside the United States like-kind?
No. Section 1031(h) provides that real property in the United States and real property outside it are not like-kind, regardless of the length of the lease.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Treas. Reg. §1.1031(a)-1 (like kind; 30-year leasehold example)
- Treas. Reg. §1.1031(a)-3 (definition of real property)
- TD 9935 preamble, 85 Fed. Reg. 77365 (Dec. 2, 2020)
- IRS Publication 544 (2025), Like-Kind Exchanges
- Peabody Natural Resources Co. v. Commissioner, 126 T.C. 261 (2006)
- Century Electric Co. v. Commissioner, 192 F.2d 155 (8th Cir. 1951)
- Rev. Proc. 2004-51 (limits on parking arrangements)
- Rev. Proc. 2000-37 (qualified exchange accommodation arrangements)
- Rev. Rul. 2004-86 (Delaware statutory trusts)
- PLR 200649028 (QI assignment mechanics)