Real Estate Tax Calc
Pre-2018: personal property could qualify
Before the Tax Cuts and Jobs Act of 2017 (effective for exchanges completed after December 31, 2017), Section 1031 applied broadly to property held for productive use in a trade or business or for investment. This included not just real estate but also machinery, vehicles, aircraft, artwork, and other tangible personal property — as long as the exchanged items were of the same 'class' or 'nature or character.' Heavy equipment dealers, aircraft owners, and farmers used 1031 exchanges on personal property routinely.
Post-2018: real property only
The TCJA amended IRC Section 1031 to limit like-kind exchanges to real property only. Personal property exchanges — equipment, vehicles, artwork, collectibles, machinery — no longer qualify for tax deferral under Section 1031 for exchanges completed after December 31, 2017. Gains on personal property dispositions are recognized immediately and taxed accordingly.
For real estate investors, this change has minimal day-to-day impact because rental buildings are real property and still qualify. The change matters more to businesses that had used 1031 to defer gains on equipment or vehicles.
What this means for cost segregation components
Cost segregation reclassifies building components as personal property (5- or 7-year assets under Section 1245). These components are attached to the building and are treated as real property for 1031 exchange purposes despite their personal property classification for depreciation. The exchange of the entire property, including its cost-segregated components, qualifies under Section 1031 as an exchange of real property. The recapture on those components is deferred inside the exchange like everything else.
How 'real property' is now defined for 1031
To administer the TCJA change, the IRS issued final regulations in 2020 (T.D. 9935, § 1.1031(a)-3, effective for exchanges after December 2, 2020) that define real property for Section 1031 purposes. Real property includes land and improvements to land, unsevered natural products of the land, and water and air space above land. Improvements consist of inherently permanent structures (buildings and other structures permanently affixed) and their structural components (walls, HVAC systems, plumbing, wiring, and the like).
The regulations also treat property as real property if it is classified as such under the state or local law where it is located, and they provide factor-based tests for anything that is not obviously land or a building. Notably, the regulations removed the old 'purpose or use' test — an item's function no longer determines whether it is real property, only its physical and legal characteristics.
Incidental personal property in a real estate exchange
Real estate deals often include some tangible personal property — appliances, furniture in a furnished rental, or equipment that conveys with the building. The final regulations added an incidental property rule: personal property is disregarded for purposes of the identification rules if it is typically transferred together with the real property and its aggregate fair market value is no more than 15% of the value of the replacement real property.
'Disregarded for identification' is not the same as 'like-kind,' though. The incidental personal property is still not like-kind property — any value you receive in it is treated as boot and is taxable to the extent of gain. The 15% rule simply keeps a modest amount of personal property from blowing up the exchange on a technicality; it does not make that personal property tax-deferred.
What businesses that used personal-property 1031s do now
Before 2018, dealers and operators routinely deferred gain on trade-ins of vehicles, aircraft, heavy equipment, and machinery through like-kind exchanges. With that option gone, the trade-in of a business asset is now a taxable disposition: you recognize gain (often Section 1245 recapture at ordinary rates) on the difference between the trade-in value and the adjusted basis.
The offset is the expensing regime. Bonus depreciation and Section 179 let a business immediately deduct much or all of the cost of the newly acquired asset, which can wash out the gain recognized on the old one in the same year. It is not true deferral — the timing and character differ — but for many taxpayers the immediate deduction on the replacement roughly offsets the recognized gain, softening the loss of personal-property 1031 treatment.
Section 1033 and other remaining deferral options
A narrow deferral path survives for personal property: IRC § 1033, involuntary conversions. If business or investment property (real or personal) is destroyed, stolen, condemned, or lost to a casualty and you reinvest the proceeds in qualifying replacement property within the statutory window (generally 2 years, longer for certain events), you can defer the gain. Unlike § 1031, § 1033 has no qualified intermediary requirement and lets you receive the proceeds directly.
For real estate investors, the practical takeaway is unchanged: your rental buildings, land, and their permanently attached components are real property and continue to qualify for § 1031. The personal-property restriction rarely bites on a straightforward real estate exchange — it matters mainly when a deal bundles in a meaningful amount of movable equipment or inventory.
The domestic-versus-foreign rule still applies
One long-standing limit is unrelated to the personal-property change but often confused with it: real property located in the United States is not like-kind to real property located outside the United States (IRC § 1031(h)). You cannot exchange a U.S. rental for a villa abroad on a tax-deferred basis, no matter how similar the properties are. Foreign real property can be exchanged for other foreign real property, but the U.S./non-U.S. line is a hard boundary.
So when planning any exchange, confirm two things: the property on both sides is real property under the current definition, and both properties sit on the same side of the U.S. border. Miss either and the deferral fails even if every deadline and intermediary requirement is met.
Planning around the change: a worked comparison
Consider a landscaping company that, pre-2018, would trade in a $60,000 skid steer (adjusted basis $10,000) plus $40,000 cash for a new $100,000 machine and defer the $50,000 built-in gain under a personal-property 1031. Today that trade-in is a taxable disposition: the company recognizes $50,000 of gain, largely Section 1245 recapture at ordinary rates.
The modern playbook offsets it on the buy side. The company acquires the new $100,000 machine and, with 100% bonus depreciation restored for qualifying property placed in service after January 19, 2025, deducts the full purchase price in year one. The $100,000 deduction more than covers the $50,000 recognized gain, so on a net basis the transaction can be tax-neutral or even generate a deduction — without any exchange, qualified intermediary, or 45/180-day deadlines. It is not the same as deferral (character and timing differ, and the recapture is real income), but for a profitable business that can use the deduction, the outcome is frequently as good or better. Real estate investors, by contrast, still use Section 1031 directly, because their buildings and land remain real property.
Interests that still count as real property
The 2020 regulations sweep in more than just fee ownership of land and buildings. Leaseholds with a remaining term of 30 years or more, easements and other perpetual rights in land, fee interests, co-ownership (tenancy-in-common) interests, and options to acquire real property generally qualify as real property for Section 1031. So do Delaware Statutory Trust (DST) beneficial interests (per Rev. Rul. 2004-86) and many land improvements that are inherently permanent. What this means in practice is that the personal-property restriction rarely limits real estate investors — you can exchange a fee simple for a long-term leasehold, or a whole building for fractional DST interests, and still be entirely within the definition of real property. The restriction bites only when you try to defer gain on genuinely movable equipment, inventory, vehicles, or intangibles.
Reporting the exchange and the incidental-property boot
Every like-kind exchange is reported on Form 8824, filed with the return for the year you transferred the relinquished property. When a real estate deal bundles in tangible personal property — furniture in a furnished rental, equipment that conveys with the building — that personal property is not like-kind, even if the 15% incidental-property rule keeps it from breaking your 45-day identification. Any value you receive in the personal property is boot, taxable to the extent of your gain, and is reported alongside the exchange. Practically, a buyer and seller often allocate a modest, defensible value to the conveyed personal property so the boot (and the resulting recognized gain, frequently Section 1245 recapture at ordinary rates on that slice) is small. If the personal property carries meaningful value, consider handling it as a separate cash sale rather than letting it muddy the exchange, and document the allocation in the closing statement.
Frequently asked questions
Can I do a 1031 exchange on equipment or vehicles?
No. Since the Tax Cuts and Jobs Act of 2017, Section 1031 only applies to real property. Personal property exchanges completed after December 31, 2017 do not qualify.
What is the 15% incidental property rule?
Under the 2020 final regulations, personal property that is typically transferred with real property and whose value is 15% or less of the replacement property's value is ignored for the 1031 identification rules. It is still not like-kind, though — its value is treated as taxable boot to the extent of gain.
Can I exchange a U.S. rental for property in another country?
No. U.S. real property and foreign real property are not like-kind under IRC 1031(h). You can exchange foreign property for other foreign property, but not across the U.S. border.
If personal-property 1031s are gone, how do businesses defer gain on equipment trade-ins?
There is no direct replacement. Businesses recognize the gain on the disposed asset but often offset it with bonus depreciation or Section 179 expensing on the newly acquired asset. Section 1033 still allows deferral when property is lost to an involuntary conversion such as a casualty or condemnation.
Are the appliances and furniture in my furnished rental like-kind property?
No. Those items are personal property, not real property, so they are not like-kind. Under the incidental property rule they can travel with the exchange without breaking the identification rules if their value is 15% or less of the replacement property, but any value you receive in them is treated as taxable boot to the extent of gain.
Does the type of building matter, or just that it's real estate?
Just that it is real property held for investment or business use. Since the TCJA change and the 2020 final regulations, like-kind is read broadly among real property types: raw land, an apartment building, an office, and a warehouse are all like-kind to one another. What no longer qualifies is personal property, and what never qualified is U.S. real property exchanged for foreign real property.
Do cost-segregated components (5-year property) qualify for 1031?
Yes — when exchanging the entire rental property. The cost-segregated components are part of the real property being exchanged and the deferred gain (including Section 1245 recapture) carries into the replacement property.
What replaced 1031 for personal property?
There is no direct equivalent. Section 179 and bonus depreciation can accelerate deductions on new personal property purchases, but gain on disposals is taxable. Section 1033 (involuntary conversions) still allows deferral in specific situations.
Can I exchange a fee interest for a long-term leasehold?
Yes. A leasehold with a remaining term of 30 years or more is treated as real property under the 2020 regulations, so it is like-kind to a fee interest. Easements, tenancy-in-common interests, options to acquire real estate, and DST beneficial interests generally qualify as real property as well.
How is the personal property in a real estate deal reported?
The exchange goes on Form 8824. Any tangible personal property that conveys with the building is not like-kind — its value is treated as taxable boot to the extent of gain, even if the 15% incidental-property rule kept it from breaking your 45-day identification. Keeping the allocated value small, or selling the personal property separately for cash, limits the taxable slice.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.