What Property Qualifies as 'Like-Kind'?

Real property for real property

Most U.S. investment or business real estate is like-kind to other U.S. investment real estate. You can exchange an apartment building for raw land, or a rental house for a strip mall.

What no longer qualifies

Since the 2018 tax law, personal property (equipment, vehicles) no longer qualifies for 1031 treatment — it's real estate only now.

Held for investment or business

The property you sell and the one you buy must both be held for investment or productive use in a trade or business — not primarily for personal use or resale.

"Like-kind" is about use and nature, not quality or type

A common misconception is that you must swap the same kind of building — an apartment for an apartment. In reality, for real estate the like-kind standard is remarkably broad: raw land, a single-family rental, an apartment complex, an office building, a warehouse, farmland, a strip mall, and even certain long-term leaseholds are all like-kind to one another. What matters is that both properties are real property located in the United States and held for investment or business use — not their grade, location, or income level. You can trade improved property for unimproved, or a fully leased building for vacant land, without a problem.

What the 2018 tax law changed

Before 2018, Section 1031 covered many kinds of business assets — equipment, vehicles, aircraft, artwork, even franchise rights. The Tax Cuts and Jobs Act narrowed the statute so that for exchanges completed after December 31, 2017, only real property qualifies. Personal property and intangibles no longer get 1031 treatment at all. If a portion of your deal includes personal property (say, furniture in a furnished rental), that piece is treated as taxable boot rather than like-kind.

Property that does NOT qualify

Several categories are excluded even when real estate is involved: your primary residence and a second home used mainly for personal enjoyment; dealer property or inventory held primarily for resale (classic fix-and-flips, and lots held by a developer); partnership interests (you exchange the underlying real estate, not the partnership share); and stocks, bonds, notes, or other securities. Intent matters: a property you bought to flip quickly is inventory, not investment property, and doesn't qualify — regardless of how you label it.

Domestic vs. foreign real estate

Location draws a hard line. Under Section 1031(h), U.S. real property is not like-kind to real property located outside the United States. You can exchange a U.S. rental for another U.S. rental, or a foreign property for another foreign property, but you cannot exchange a U.S. building for one abroad and defer the gain. For this rule, U.S. territories generally count as foreign.

Vacation homes and mixed personal use

A vacation home can qualify only if it is genuinely held for investment, not personal enjoyment. Revenue Procedure 2008-16 provides a safe harbor: for each of the two years before (for the relinquished property) or after (for the replacement) the exchange, you must rent the home at fair market value for at least 14 days and limit your personal use to no more than 14 days or 10% of the days rented. A property used mainly for family getaways will not pass this test.

Long-term leaseholds and other real-property interests

The definition of real property for 1031 purposes also reaches certain interests beyond fee-simple ownership. A leasehold with 30 or more years remaining (including options) is treated as like-kind to a fee interest in real estate. Other qualifying interests can include easements, mineral and water rights, and tenancy-in-common (TIC) interests when properly structured — useful building blocks for investors assembling or fractionalizing a replacement property.

Fractional ownership: TIC and DST interests

Investors who want a passive replacement often turn to a tenancy-in-common (TIC) interest or a Delaware Statutory Trust (DST). A properly structured TIC gives you a direct, deeded fractional interest in real estate, which is like-kind. A DST interest qualifies as replacement property under Revenue Ruling 2004-86, which treats a beneficial interest in a properly structured trust as a direct interest in the underlying real estate rather than a security. Both let you place exchange funds into institutional-grade property without active management — handy when the 45-day clock is running and you can't find a whole property to buy.

The related-party rules

Exchanging with a related party (family members or entities you control) is allowed but comes with a trap: under Section 1031(f), if either party disposes of the exchanged property within two years, the original deferral is generally undone and the gain becomes taxable. The rule exists to stop families from shifting basis to a low-tax member and cashing out. Related-party exchanges are doable but should be run past a tax advisor, because the two-year holding requirement and anti-abuse provisions are strictly enforced.

Intent and holding period are what the IRS tests

There's no bright-line holding period in the statute, but intent to hold for investment is the crux of qualification. Buying a property, taking a 1031, and immediately converting it to personal use — or flipping it — invites the IRS to recharacterize the deal. Many practitioners suggest holding replacement property for at least a year or two and documenting investment use (rental agreements, Schedule E reporting) to demonstrate intent. The facts and circumstances, not a magic number of days, control.

Converting between investment and personal use

Because only investment or business property qualifies, timing matters when a property changes character. You cannot exchange your current home, but you can 1031 a rental and — after holding it as an investment for a meaningful period — potentially convert it to a residence later (with its own recapture and Section 121 consequences). Likewise, a former residence generally must be genuinely converted to a rental and held for investment before it can headline an exchange. Plan these conversions deliberately; abrupt changes right around the exchange date are exactly what examiners scrutinize.

Multiple properties, on either side

Like-kind doesn't mean one-for-one. You can relinquish a single property and acquire several replacements, or consolidate several sales into one larger replacement — as long as the identification rules (three-property, 200%, or 95%) are satisfied and the values and debt line up to avoid boot. This flexibility is what lets investors trade up from several small rentals into one apartment building, or diversify one large sale into multiple markets. Each property still has to independently meet the like-kind and investment-use tests; the count is flexible, the qualification standard is not.

Land, air rights, and unusual real-property interests

The breadth of "real property" surprises many investors. Beyond buildings and land, qualifying interests have included perpetual conservation or development-rights easements, certain transferable development rights (TDRs), water and mineral rights treated as real property under state law, and communications-tower or billboard easements in some rulings. The final regulations under the TCJA lean on state-law classification and a facts-and-circumstances test to decide what counts as real property. If your interest is unusual, get a written opinion before relying on 1031 treatment — the general rule is favorable, but the edges are fact-specific.

Documenting investment intent

Because qualification hinges on holding for investment or business use rather than a fixed holding period, your documentation is your best defense. Report the property on Schedule E, keep leases and rent records, avoid meaningful personal use, and don't market the replacement for resale immediately after acquiring it. If you ever need to demonstrate intent to an examiner, contemporaneous records showing genuine investment use carry far more weight than after-the-fact assertions. Treat the year or two around an exchange as the period when clean, consistent investment-use records matter most.

What "held for productive use in a trade or business" adds

The statute qualifies two categories: property held for investment and property held for productive use in a trade or business. The second phrase matters because it sweeps in property you actively use to run a business — an owner-occupied warehouse, a working farm, a self-managed commercial building — not just passive rental holdings. Both the relinquished and replacement property can fall into either category and still be like-kind to each other; you can exchange investment raw land for a building you'll use in your business, or vice versa. The common thread is that neither property is held primarily for personal use or as inventory for resale.

A quick self-check before you exchange

Before assuming your deal qualifies, run four questions. Is it real property? (Personal property no longer qualifies.) Is it in the United States? (U.S. and foreign real estate aren't like-kind.) Is it held for investment or business — not personal use or resale? (Homes and flips are out.) Can you document that intent? (Schedule E, leases, no quick flip.) If you can answer yes to all four for both the property you're selling and the one you're buying, the like-kind requirement is almost certainly met — the breadth of the rule means the harder work is usually meeting the deadlines and value-matching, not the like-kind test itself.

Incidental personal property and the 15% rule

Since 2018 only real property is like-kind, so the appliances, furniture, and equipment that come with a building are no longer eligible — they are boot, and any gain allocable to them is taxable. But a practical safe harbor keeps small amounts of personal property from complicating the exchange mechanics: under Reg. § 1.1031(k)-1(c)(5), personal property that is incidental to the real property is disregarded for the identification rules if its value is no more than 15% of the total value of the replacement real property and it is typically transferred together with that real estate.

Understand precisely what the safe harbor does and does not do. It means you do not have to separately identify the stove and the sofa within your 45-day identification, and their presence does not by itself blow the exchange. It does not make that personal property like-kind — you still recognize gain on the personal-property portion as boot. For a furnished short-term rental, allocate the purchase price between real property and personalty, exchange only the real property, and expect to pay tax on the furniture slice.

State conformity and clawback rules

Section 1031 is federal, but state treatment varies and can surprise you. Most states conform, so the federal deferral flows through to the state return. A few do not fully conform in the ways that matter. Pennsylvania historically did not recognize 1031 deferral for personal income tax (it began conforming only for exchanges completed in recent years), so older PA exchanges could be federally deferred yet fully taxable at the state level.

California's clawback is the one to plan around. When you exchange California property for out-of-state replacement property and defer the gain, California requires you to file Form FTB 3840 every year thereafter to track the deferred California-source gain. When you eventually sell the replacement property in a taxable transaction, California taxes the portion of gain attributable to the original California property — even if you have since moved away. Oregon, Massachusetts, and Montana have similar tracking regimes. Always check both states in an interstate exchange; a clean federal exchange can still carry a lurking state bill.

Your recovery period can change when you trade property types

Because most investment real estate is like-kind to other investment real estate, you can exchange a residential rental for a commercial building or vice versa. That changes your depreciation recovery period going forward. Residential rental property is depreciated over 27.5 years; nonresidential (commercial) real property over 39 years. Under Reg. § 1.168(i)-6, the carryover (exchanged) basis generally continues on the relinquished property's remaining schedule and method, while the excess basis from any new cash or debt is treated as newly placed-in-service property depreciated over the recovery period that fits the replacement property.

In practice this means a single building can end up with two depreciation schedules running at once — one inherited from the old property, one for the new money — potentially on different recovery periods if you crossed the residential/commercial line. You may elect out of the default treatment and instead depreciate the entire carryover basis as if newly acquired, but that election has trade-offs. Either way, do not assume your new commercial building simply starts a fresh 39-year clock on the whole value; the like-kind rules deliberately preserve the old, lower basis.

Qualifying as like-kind doesn't make the deal tax-free

The like-kind test is only the entry ticket. Even when both properties clearly qualify, you recognize gain to the extent you receive boot — cash taken out, non-like-kind property received, or a net reduction in debt. The classic surprise is debt relief: if you sell a property with a $300,000 mortgage and buy one with only a $220,000 mortgage without adding cash, the $80,000 of net debt relief is treated as boot and is taxable, regardless of how perfectly like-kind the real estate is.

So the practical rule for a fully tax-deferred exchange is to trade up or equal in both value and debt, and to reinvest all the net proceeds. Meeting the like-kind requirement gets you into Section 1031; matching value and debt is what actually keeps the gain deferred. Investors who focus only on the like-kind question and ignore the debt and equity math are the ones who get an unexpected tax bill on an otherwise valid exchange.

Frequently asked questions

Sources

• IRS — Like-Kind Exchanges (Real Estate Tax Tips)
• IRS — About Form 8824

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

Related

• 1031 Exchange Calculator
• 1031 Exchange Rules and Deadlines