Exchange Strategies
Exchanging Water Rights Under Section 1031: When Water Is Real Property — and When It Is Not
In the West, the water is often worth more than the ground it runs across — and increasingly it is bought, sold, and moved on its own, apart from any farm. Can a water right, standing alone, be exchanged tax-deferred under Section 1031? Sometimes yes, sometimes no. The line runs through two things — whether state law treats the right as real property, and whether the right is perpetual rather than limited in time, quantity, or priority. This article walks the whole doctrine: riparian versus prior-appropriation systems, appurtenant versus severed rights, mutual ditch and irrigation-company shares, the controlling authorities from Rev. Rul. 55-749 to PLR 202309007, the cautionary lesson of Wiechens, and how it all lands in Washington State.
September 16, 202615 min read