Recreational Land and the Investment-Use Requirement

Investment land can still be enjoyable

Section 1031 applies to real property held for investment or productive use in a trade or business. Recreational land is not automatically excluded. A tract held for long-term appreciation, timber production, agricultural leasing, conservation income, or other bona fide investment activity may present a stronger qualifying-use case.

Personal enjoyment does not create a simple bright-line test for raw land. Heavy personal use, a personal residence, or facts showing that the property was acquired mainly for recreation can weaken the investment position.

Document the purpose and the facts

Owners should preserve records that support the property’s investment or business purpose. No single item controls, but the overall record may be important if the exchange is later examined.

• Leases for farming, grazing, hunting, timber, or other income-producing uses
• Management plans, timber inventories, and improvement records
• Income and expense records reported consistently with the property’s use
• Broker, appraisal, and acquisition materials reflecting investment objectives
• A log distinguishing personal visits from management or business activity

Cabins and dwellings require added care

If a tract includes a dwelling used personally, the analysis becomes more complex. IRS Revenue Procedure 2008-16 provides a safe harbor for certain dwelling units held for investment and also used personally, but its rental and personal-use limits must be examined closely.

Before marketing recreational property—or identifying a replacement tract—owners should discuss the actual use history and intended use with their tax adviser.