Less than you fear, and far less than selling the whole property. The gain is computed on the land’s allocated basis only, there is no depreciation recapture because land was never depreciable, the ground rent you pay afterward is deductible, and if you want full deferral, the proceeds are 1031-eligible. You keep the building, the upside, and every dollar of its remaining depreciation.
A $10M property with $500K of NOI, bought years ago for $6M with a typical 20% land allocation ($1.2M land basis), and $1.5M of depreciation taken on the building. Two ways to raise cash:
| What happens | Sell the whole property ($10M) | Sell only the land (~$3M via ground lease) |
|---|---|---|
| Gain recognized | ~$5.5M — on everything, all at once | ~$1.8M — on the land’s allocated basis only |
| Depreciation recapture | Yes — $1.5M of unrecaptured §1250 gain taxed at up to 25% | None. Land was never depreciated; recapture stays dormant in the building you still own |
| Character of gain | Capital gain + recapture layer | Long-term capital gain |
| The building and its upside | Gone | Still yours — operations, cash flow, promote, and all future appreciation |
| Ground rent going forward | n/a | A deductible operating expense |
| Want zero tax now? | 1031 the whole sale — and buy a whole new property | 1031 the land proceeds into any US real estate, same 45/180-day rules |
Why this works: the IRS taxes what you sell. A ground lease sells the one layer of the deal with no depreciation history and the lowest basis-to-value drama, and leaves the tax-sheltered layer — the building — in your hands. Numbers above are illustrative; your allocation controls, so run it with your CPA.
No. Depreciation recapture applies to depreciated property, and land is never depreciable. Recapture exposure lives in the improvements — which you keep. The land-only gain is long-term capital gain.
Sale price of the land minus the land’s allocated tax basis (from your original purchase-price allocation). Only the land layer’s gain is recognized; the building’s basis and its built-up recapture are untouched until you sell the building, if ever.
Yes. Ground rent on a true lease is an ordinary and necessary operating expense of the property, deductible like any other rent. That partially offsets the income the land sale freed up.
Usually, yes — a leased-fee interest is real property, so the land-sale proceeds are 1031-eligible into any like-kind US real estate under the normal 45-day identification and 180-day closing rules. Talk to a qualified intermediary before closing; the exchange must be set up in advance.
Send the address, the stabilized NOI, and your rough basis — an indicative land value comes back fast, and your CPA can put the tax answer next to it. Fee positions under $15 million are our lane, and we have quietly done this for ten years.
Email us the property