Michael HenningerCEO/Founder, Main Street CFO & Tax Advisors · Founder of Main Street CFO and Tax Advisors

The Friday Blueprint.. #construction #trades #weeklycfoinsight

18 Sept 2026 · 2 min

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1:43

In this brief explainer, the speaker outlines the fundamentals of a Section 1031 exchange, which allows taxpayers to defer capital gains tax by swapping real estate held for use in a trade or business or for investment with a replacement property. He then addresses a common misconception in the real‑estate development sector: developers often treat land purchased for ground‑up projects as exchange‑eligible inventory. Because such land is classified as inventory—not as property held for use in a trade or business or for investment—it cannot be used in a 1031 exchange. The speaker emphasizes that this misunderstanding is widespread but unintentional, and advises listeners to recognize the distinction to avoid improper tax treatment.

Chapters

So earlier in the week, I was talking about the 1031 exchange and how it's basically a way for a taxpayer that has real estate that's held for use in a trade or business or held for investment, how they can sell that asset. And instead of paying tax on whatever the gain is, they can roll all that into another property, which is called the replacement property. And sort of kick that tax bill down the road, the tax can down the road a little bit. Now, one thing that happens a lot of times is that that concept gets thrown around in a way, especially in the real estate development world, where those are generally people who will buy land for a project that they're going to— they're going to ground-up development. And then they're going to sell that thing. So they sometimes think that, oh, when I'm done with this project, I'll just 1031 that into another project. The problem is that that industry, when they're buying land like that, that land is inventory. It's not real estate held for use in a trade or business or held for investment in the way that Section 1031 describes. So you can't 1031 those types of properties. Pieces of real estate because they're inventory and you can't 1031 exchange inventory. So I hope that helps. It's one of the big, it's a, you know, it's a myth misconception kind of thing. And it's not done, it's not done deliberately, you know, most of the time it's just that it's a misunderstanding about what exactly is allowed to be used in a 1031 exchange. So hope that helps. If you have any questions, let me know. Talk soon.