At Lucas Real Estate, we frequently assist clients with 1031 exchanges – perhaps the best tax ‘break’ still on the books, available exclusively to real estate investors, the “1031 Exchange” allows an investment property owner to sell one or more investment properties, and purchase replacement investment properties(s), without any capital gains tax due at the sale. The capital gains are deferred until any eventual sale whereby the owner “cashes out”, or at death and inheritance, which, coupled with currently favorable tax laws, may lead to zero taxes due on the properties to your heirs. (See are in depth article on the ‘big picture’ of 1031 exchange requirements and strict timelines linked here.)

Questions? If you’re selling a property, seeking REALTOR® services, or exploring a traditional commission-based home sale or purchase, we’re here to help – free of charge. Call us anytime at (949-478-1623) or email [email protected] for your complimentary consultation and market evaluation.

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This article focuses on a unique situation: Can you use a 1031 exchange for a empty home or vacant home, one that has not been used for rental purposes, but likewise has not been used personally by the owner? What happens when the property in question has been sitting vacant for years? Can a home that has never been rented or used for personal purposes still qualify for a tax-deferred exchange?

While there is ample guidance on vacant land, this question pertains to a vacant house. This situation may arise, for example, to an inherited property which the heirs simply never utilized for their own personal use or for rental purposes, instead just allowed the home to remain vacant for sometime and now wish to explore the sale of the home. (while a ‘step up in basis’ normally would eliminate any potential capital gains to the heirs, this hypothetical would require the home to be owned for sometime, thus the value since the date of death has greatly increased, this capital gains would be due – see our article here on the step up in basis.)

The Key Requirement: Investment Intent

The IRS allows 1031 exchanges for properties held for investment or productive business use. This typically includes rental properties, commercial buildings, and even vacant land. But a property that has remained vacant for years without generating income raises a red flag. The central question is whether the owner can demonstrate investment intent.

What Determines Investment Intent?

Since the IRS does not explicitly require a property to produce income to qualify for a 1031 exchange, the following factors help establish whether a vacant home was truly held for investment:

1. Intent at Acquisition – Did the owner buy the property as an investment with the goal of appreciation, future rental income, or resale at a profit?
2. Holding Period – A longer holding period (typically two years or more) can indicate investment intent.
3. Tax Treatment – Was the property reported as an investment on tax returns? Was depreciation claimed?
4. Marketing Efforts – Has the property been listed for rent or sale, even if it was never occupied?
5. Insurance Classification – Was it insured as an investment property rather than a personal residence?
6. No Personal Use – If the property was never used as a primary or secondary residence, it strengthens the case for investment classification.

IRS Guidelines and Safe Harbor Rules

While there is no strict holding period requirement from the IRS, Revenue Procedure 2008-16 provides a safe harbor for properties held for investment purposes. Generally, holding a property for at least two years and avoiding personal use strengthens its qualification for a 1031 exchange.

Additionally, the IRS has ruled in some cases that properties held for appreciation alone can still qualify for 1031 treatment, even if they never produced rental income. However, this argument is much stronger when paired with evidence such as marketing efforts or tax filings reflecting an investment classification.

Case Law and Precedents

Several court cases and IRS rulings provide guidance on how vacant properties are treated in 1031 exchanges:

• Alderson v. Commissioner (1963) – The court ruled that investment intent, rather than actual rental income, determines 1031 eligibility. A taxpayer who held land for appreciation successfully completed a 1031 exchange. The Alderson case set an important precedent in 1031 exchanges, particularly regarding investment intent. The taxpayer owned land that was not rented out but was held for appreciation. The IRS initially challenged the exchange, arguing that the lack of rental income disqualified the property from 1031 treatment. However, the court ruled in favor of the taxpayer, emphasizing that investment intent does not require actual rental income—holding a property for future appreciation was sufficient.
• Reesink v. Commissioner – A property that was never rented but marketed as an investment was still deemed eligible for a 1031 exchange. This Tax Court case analyzed whether replacement properties in a 1031 exchange were genuinely held for investment. One key takeaway was that the taxpayer’s actions following the exchange mattered: minimal rental efforts combined with quick personal use led to disqualification, whereas properties that had been advertised for rent and maintained as investments—despite no immediate rental—qualified. This case highlights the importance of documenting intent through rental listings, insurance classifications, and tax filings.
• Byram v. United States (1983) – This case reinforced that frequent sales activity could indicate a business rather than an investment intent, but passive long-term holding supports an investment classification. The Fifth Circuit Court of Appeals examined whether repeated real estate sales indicated an active trade or business rather than investment activity. The IRS argued that frequent sales meant the taxpayer was engaged in a business rather than passive investment. However, the court found that the taxpayer had minimal personal involvement in the transactions, did not make improvements, and did not develop the land—all factors that supported a classification as an investment rather than a business. The ruling underscored that passive long-term holding strengthens a 1031 claim
• Magneson v. Commissioner – This ruling clarified that immediate intent to hold a property for investment, even if future personal plans were considered, could still allow for a 1031 exchange. The Magneson case clarified that the taxpayer’s immediate intent upon acquiring the replacement property was critical. The IRS had challenged the exchange because the taxpayer had plans to eventually gift the replacement property. However, the court ruled that as long as the initial intent was to hold the property for investment—regardless of later plans—it still qualified under 1031 rules. This case reinforces that future intentions (such as eventual gifting or personal use) do not necessarily disqualify a property, provided that investment intent exists at the time of the exchange.

Common IRS Challenges for Vacant Property Exchanges

Given the gray area around vacant properties, the IRS may challenge a 1031 exchange if:

• There is no evidence of an investment purpose (e.g., no marketing, no tax treatment as an investment, no business-related intent).
• The property was recently acquired and sold quickly without being rented or listed.
• The owner has a history of flipping properties, which may indicate a business rather than an investment strategy.

How to Strengthen Your 1031 Case for a Vacant Property

If you’re planning a 1031 exchange involving a long-vacant property, consider taking steps to document investment intent:

• Gather records showing how the property was treated (tax filings, insurance policies, past listings for sale or lease).
• Provide written statements outlining the owner’s investment intentions at the time of acquisition and during ownership.
• Work with a Qualified Intermediary (QI) to ensure all requirements are met and avoid pitfalls in structuring the exchange.
• Consult a tax professional to ensure compliance with IRS regulations and mitigate audit risks.

Final Thoughts

A property doesn’t need to generate income to qualify for a 1031 exchange—but the burden is on the taxpayer to prove investment intent. If you’re considering a 1031 exchange for a vacant home, preparation is key. By assembling the right documentation and understanding IRS expectations, you can successfully defer capital gains taxes while transitioning into a new investment property.

Need guidance on structuring your exchange? Contact us for expert insights on navigating the 1031 process with confidence.

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– Devin Lucas

Author Devin R. Lucas is a Real Estate Broker, REALTOR® and Real Estate Attorney specializing in Newport Beach, Costa Mesa, and Orange County coastal communities. Courtney Lucas, a licensed CPA, Real Estate Salesperson, and REALTOR®, provides expert financial insight alongside real estate services. Together, they lead Lucas Real Estate, operating in conjunction with Coldwell Banker, the region’s premier luxury brokerage.

Lucas Real Estate offers unmatched expertise in California real estate sales, capital gains strategies, and property tax matters, including Propositions 13, 58, 193, 60, 90, and new Proposition 19.

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If you’re selling a property, seeking REALTOR® services, or exploring a traditional commission-based home sale or purchase, we’re here to help – free of charge. Call us anytime at (949-478-1623) or email [email protected] for your complimentary consultation and market evaluation.

For discussions requiring real estate legal advice, private family sales, family transfers, or tax-related matters, please schedule a paid one-hour consultation via Zoom, phone, or in person using this calendar (Book a consultation here.)  Upon booking, you’ll receive instant confirmation and a Zoom link if applicable.

Contact our office to discuss your 1031 exchange – buying, selling, or both.

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The content on this blog is for informational purposes only. Nothing on this blog should be construed to be legal advice, and you should not act or refrain from acting on the basis of any content on this blog without seeking appropriate legal advice regarding your particular situation, from an attorney licensed to practice law in your state. The content on this blog is not guaranteed to be correct, complete, or up to date. Devin R. Lucas’ office is in Newport Beach, California and is only licensed to practice law in California. Please be advised that Devin R. Lucas only provides legal services or advice pursuant to a written legal services agreement. The content on this blog is not intended to, and does not, create an attorney-client relationship between you and Devin R. Lucas, nor does our receipt of an email or other communication from you. Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised this is an advertisement.

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