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Sell your Solar or Wind Lease, Qualify for a 1031 Exchange

Updated: Jun 3

photogrph of a solar farm with wind turbines in the background with a sunset

Property owners who have leased their land for solar or wind energy development can consider selling their lease payments for a lump sum upfront. Not only is this a great way to combat inflation and mitigate the risk of terminated future lease payments, but these types of transactions can also qualify for a 1031 exchange, allowing property owners to reduce tax impacts and invest in other properties.

Disclaimer: This article is not intended to be used as legal advice; LandGate can not provide legal advice. It is intended to be used as a tool to inform property owners who have leased their land of all of their options moving forward.

What is a 1031 Exchange?

A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code. It allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like-kind and equal or greater value.

While traditional real estate properties are typically used in 1031 exchanges, renewable energy leases can also qualify as like-kind property. This opens up a whole new opportunity for property owners who may not have considered a 1031 exchange before.

How Do You Qualify for a 1031 Exchange?

The sale of a lease does not always qualify for a 1031 exchange, so it is important that property owners consult with an attorney or a 1031 specialist when weighing out their options. Here are the general considerations for the sale of lease payments to qualify for 1031 treatment:

  • Selling the land along with the lease: The only way to guarantee that the sale of a lease qualifies for 1031 treatment is to sell the land along with the lease. However, property owners can still retain ownership of the land and just sell the lease payments up front for a lump sum.

  • Remaining lease length: There must be 30 years remaining on a lease in order for it to qualify for 1031 treatment if the land is not sold along with the lease.

  • Conveyance of an Easement: An easement must be established for the production of solar/ wind power in order for a property owner to sell their lease on its own without also selling the land. The easement will convey an interest in land/ real estate to the buyer, allowing the sale of the lease payments to qualify for like-kind 1031 treatment.

Other Advantages of Selling Your Renewable Energy Lease

There are several advantages to selling your lease and using the proceeds for a 1031 exchange:

  • Immediate Cash Flow: By selling your lease payments for a lump sum upfront, you can immediately put that money to work in another investment.

  • Defer Capital Gains Taxes: By reinvesting the proceeds from the sale of your lease into another property, you can defer paying capital gains taxes on the sale.

  • Diversify Your Portfolio: Selling your renewable energy lease and investing in other properties allows you to diversify your investment portfolio and potentially reduce risks.

  • Avoid Risk of Future Lease Terminations: Energy leases can be terminated by the developer at any time, halting your lease payments indefinitely. By selling your lease payments up front for a lump sum, you are no longer at risk for future terminated lease payments- that risk will then fall on the purchaser of the lease. This can provide peace of mind and more stability in your investment strategy.

Overall, selling your renewable energy lease and utilizing a 1031 exchange can be a smart financial move for property owners, providing a way to maximize profits and minimize tax impacts. It is important to consult with a qualified tax professional and financial advisor to determine if this strategy is right for you.

LandGate cannot advise on 1031 exchanges, but we can refer you to a 1031 broker and help you sell your lease payments for free on our online marketplace. It starts by finding your property on our map to generate your free property report:


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