1031 Exchanges & Leasehold Interests: The 30-Year Rule Explained

Most investors assume that only owned real estate qualifies for a 1031 exchange. But under IRS rules, certain long-term leasehold interests can also qualify as like-kind property — giving investors more flexibility than they realize.

Here’s what you need to know about how the 30-Year Rule allows leasehold interests to be used in a 1031 exchange.

What Is a Leasehold Interest?

A leasehold interest is a long-term right to use or control real estate without owning the land itself. Common examples include:

• Ground leases

• Commercial leases with long terms

• Long-term development leases

Leaseholds can be exchanged for fee simple ownership (full ownership) if they meet IRS requirements.

The IRS 30-Year Rule

For a leasehold interest to qualify as “like-kind” real estate in a 1031 exchange, the IRS generally requires:

The lease must have 30 years or more remaining

This includes:

• The initial lease term, plus

• Any renewal options that are part of the contract

If the combined total is 30 years or longer, the IRS considers the leasehold interest equivalent to real property ownership.

Example:

A 12-year lease + three 6-year renewal options = 30 years → Qualifies

A 20-year lease + one 5-year renewal option = 25 years → Does NOT qualify

Why Leasehold Interests Matter in 1031 Exchanges

Leaseholds offer strategic advantages investors often overlook:

Access to high-value locations

Ground leases in premium markets (e.g., NYC, San Francisco) may cost far less upfront than purchasing land outright.

Development opportunities

Investors can build on leased land and still complete a 1031 exchange.

Flexibility in exchange structures

Leasehold interests can be used to satisfy tight identification or replacement deadlines.

When Leasehold Exchanges Become Risky

A leasehold interest will fail to qualify if:

• The remaining term is under 30 years

• Renewal options are not contractually guaranteed

• The lease prohibits assignment or transfer

• The structure appears designed solely for tax avoidance

The IRS scrutinizes artificially extended leases, so professional guidance is essential.

Leasehold interests can be powerful tools in a 1031 exchange — offering flexibility, access to premium locations, and lower acquisition costs. But they must meet the IRS 30-Year Rule to qualify as like-kind property.

Thinking about using a leasehold interest in your exchange?

Work with an experienced Qualified Intermediary to ensure your structure meets IRS requirements — and preserves your tax benefits.