How to Avoid Capital Gains Tax on a Land Sale, and How to Sell Land or Property to Opportunity Funds

Land sellers often have the largest gains an agent sees. The land was bought decades ago, nothing was depreciated, and the price has multiplied. That makes the tax question unavoidable, and it makes Opportunity Zone funds a natural buyer for well-located sites. This guide covers both sides: the seller’s tax options, and what changes when the buyer is a fund.

It’s part of our series for agents. The hub is OZ talking points for your next listing appointment.

How a land sale is taxed

• Gain = amount realized minus basis. Basis is usually what the seller paid plus capital costs like surveys, grading or roads. Inherited land usually has a basis equal to its value at the date of death; see capital gains on inherited property.
• Investor-held land: long-term capital gain if held more than a year, taxed at 0%, 15% or 20% federally (IRC §1(h)), plus the 3.8% net investment income tax above $200,000 of modified AGI ($250,000 married filing jointly) (IRC §1411).
• No recapture on raw land. Land isn’t depreciable, so the depreciation recapture issues of rental property don’t apply to it.
• Watch for dealer status. A seller who subdivides and sells lots as a business may be a dealer, and dealer gain is ordinary income, not capital gain. IRC §1237 gives limited relief for some subdividers. If your seller plans to split the land, get the CPA involved first.
• Farmland and business land used in a trade or business is §1231 property, which is usually taxed like long-term capital gain when held more than a year.

Ways to defer or reduce the tax

Compare the first three on the seller’s numbers with the 1031 vs DST vs Opportunity Zone calculator, and find the last day to invest with the 180-day deadline calculator. For a fund investment made on or after January 1, 2027, the deferred gain is included after five years, less a 10% step-up (30% for a qualified rural fund); see the Opportunity Zone tax benefits guide.

An installment sale and an Opportunity Zone fund can work together: each payment received can start its own 180-day window (Treas. Reg. §1.1400Z2(a)-1(b)(11)(viii)).

When the buyer is an opportunity fund

A qualified opportunity fund (QOF), or a business it owns, has to meet rules that ordinary buyers don’t. Knowing them helps you keep the deal on track.

• The land must be in a zone and used in a business. Check the tract on the Opportunity Zone map. The fund generally has to build on or use the land in an active business. Land bought mainly to hold for appreciation doesn’t count (Treas. Reg. §1.1400Z2(d)-2).
• The land doesn’t have to be doubled, but buildings do. If the sale includes a building, the fund must be its first user in the zone or add more than the building’s basis within 30 months. See the substantial improvement rule for buyers.
• No related-party sales. Property bought from a related party, generally someone with more than 20% common ownership, doesn’t qualify for the fund (IRC §1400Z-2(d)(2)(D)(i)(I) and (e)(2)). That matters if the seller wants to invest in the buying fund or keep a stake in the project.
• Timing follows the fund’s capital. Funds raise money from investors who are racing their own 180-day clocks, and they have to meet asset tests twice a year. Expect buyers to ask for closing dates that line up with their capital, and possibly for extensions.
• Which map matters. For investments made in 2027 and later, funds care most about the OZ 2.0 list, which Treasury hasn’t certified for any state yet. A nominated tract can still change. The OZ 2.0 likelihood checker shows where a tract stands.

The seller gets no tax benefit just because the buyer is a fund. If the seller has gain, they can invest it in any fund within 180 days. Funds that say they invest in your state are in the Opportunity Zone funds directory.

Agent checklist for a land listing

• Basis records, or the date-of-death value if inherited
• How title is held: individually, in a trust, or in an LLC or partnership
• Whether the seller has subdivided or improved the land before (dealer risk)
• Census tract, 2018 zone status and OZ 2.0 status, dated
• Zoning, utilities, access and environmental reports for fund buyers
• The seller’s goals: cash now, terms, keep a stake, or reinvest in real estate

How to present the OZ status in the listing is covered in marketing a property in an Opportunity Zone.

Related reading

• How to avoid capital gains tax on real estate: where OZs fit
• Opportunity Zone real estate investing
• OZ talking points for agents (series hub)

Sources: IRC §1(h); IRC §1411; IRC §1237; IRC §1031; IRC §453; IRC §1400Z-2; Treas. Reg. §1.1400Z2(a)-1; Treas. Reg. §1.1400Z2(d)-2; Public Law 119-21.

Not tax advice.