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.
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.
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.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.