What Property Qualifies for a 1031 Exchange? Like-Kind Property Explained

The biggest misconception about a like-kind exchange is the name itself. Like-kind does not mean you have to swap one property for an identical one. For real estate, the rule is broad, and that surprises a lot of investors who think they are locked into trading a duplex for another duplex.

So what property qualifies for a 1031 exchange? Almost any real property held for investment or business use can be exchanged for almost any other. This guide walks through what qualifies, what does not, and the tricky situations that come up most often.

What "like-kind" really means in a like-kind exchange

The test is how you use the property, not what type it is. To qualify under the IRS rules for 1031 exchanges, both the property you sell and the property you buy must be held for investment or for productive use in a trade or business. Raw land can be exchanged for an apartment building. An office can be exchanged for a rental house. A strip mall can be exchanged for farmland. All of it is considered like-kind because it is all investment real estate.

One change is worth knowing. Since the 2018 tax law, only real property qualifies for a 1031 exchange. Equipment, vehicles, and other personal property no longer count. For real estate investors, that change rarely matters, because the rule for real property stayed broad.

Property that qualifies

Most investment real estate is eligible. Common examples include:

• Residential rentals, from single-family homes to large multifamily buildings
• Commercial property such as office, retail, and industrial space
• Raw land and farmland held for investment
• Ranches and agricultural property
• Certain mineral, oil, and gas interests held for investment

Property that does not qualify

A few categories fall outside the rules. Your primary residence does not qualify, because it is personal-use property rather than investment property, though a separate tax break may apply when you sell a home. Property you flip is also out, because fix-and-flip homes are treated as inventory held for resale, not as investments. The same goes for any property held primarily to sell rather than to hold.

Tricky scenarios, answered

Most questions we get are not about whether real estate qualifies in general. They are about specific situations. Here are the ones that come up most.

Short-term rentals and Airbnbs

A short-term rental can qualify if you hold it as an investment and limit your personal use. The more you treat it like a business and the less you vacation there yourself, the stronger your position. Personal-use days are what put these exchanges at risk.

REITs and the DST path

You cannot do a 1031 exchange directly into shares of a REIT, because shares are not real property. Some investors reach a similar result through a Delaware Statutory Trust, which can later convert into REIT units. Note that a DST is a securities investment sold through a separate broker-dealer and is available only to accredited investors. It is a different product from our qualified intermediary service, so treat it as its own decision with its own advisors.

Property held in a trust or an LLC

Whether trust-owned or entity-owned property qualifies depends on who the taxpayer is. With most revocable living trusts, you are still the taxpayer, so the exchange works normally. Partnerships and multi-member LLCs are trickier, because the entity, not the individual partners, owns the property. Investors who want to split off in different directions often plan well ahead with their advisors.

Inherited property

Inherited property usually receives a stepped-up basis, which can reduce or remove the gain. That sometimes makes a 1031 exchange unnecessary. It depends on the numbers, so check with your tax advisor before assuming you need one.

Exchanging across state lines and foreign property

You can exchange a property in one state for a property in another. An investor can sell in Texas and buy in Florida with no problem, though the state tax treatment on the sale can differ, which is why our state 1031 exchange rules guides are worth a look. Property inside the United States and property outside it are not considered like-kind to each other. You can exchange U.S. property for U.S. property, or foreign property for foreign property, but not one for the other.

Mortgaged and financed property

Having a loan on your property does not stop you from doing an exchange. To defer all of the tax, you generally need to replace the debt you pay off, either with a new loan of equal or greater size or with cash you bring to the closing. If your new loan is smaller and you do not add cash, the difference is taxable as mortgage boot.

Risks and gotchas

Intent matters, and there is no bright-line holding period in the tax code. The longer you hold a property as an investment, the easier it is to show it was not bought to flip. Related-party exchanges carry extra rules, including a two-year holding requirement, and dealer property is excluded entirely. When a situation is unusual, plan it with your tax advisor before you list the property.

Not sure if your property qualifies?

Most investment real estate is eligible for a like-kind exchange, but the details decide it. Before you sell, it pays to confirm your specific property and situation with a qualified intermediary and your tax advisor.

WealthBuilder 1031 is a nationwide qualified intermediary, attorney-owned, with a flat $1,000 fee for standard exchanges. We have helped investors structure exchanges of every property type since 2009. Have a question about your property? Call 888-508-1901 or visit WealthBuilder1031.com.

Related guides

• 1031 Exchange Across State Lines
• 1031 Exchange on Your Personal Residence
• Residential to Commercial Properties
• Owner-Occupied Multi-Family Properties
• 1031 Exchanges and Personal Residences
• Exchanging a U.S. Property for One Abroad
• Selling as Individual, Acquiring in an Entity
• Properties Excluded From a 1031 Exchange
• Can I Buy Any Property Type?
• 1031 Exchange When Downsizing
• 1031 Exchange With Property in a Trust
• Can I Use a 1031 Exchange for REITs?
• Using a 1031 Exchange to Buy an Airbnb
• Using a 1031 to Buy Foreign Property
• Can Rental Properties Qualify?
• Can You Buy Land With a 1031?
• Can You Do a 1031 Into a REIT?
• Can You Do a Leaseback in a 1031?
• Multi-State 1031 Exchanges
• What if Your 1031 Property Falls Through?
• Rental Replacement Property Unit Rules
• Do I Need to Disclose a 1031 Exchange?
• Does Financing Type Matter in a 1031?
• Flipping Properties and 1031 Exchanges
• 1031 Oil and Gas Exchanges
• Renting Part of Your House as an Airbnb
• Inheriting Investment Property and 1031s
• Trust-Owned Investment Properties
• 1031 Exchange With Multiple LLC Partners
• Owning Mortgaged Investment Property
• How to Finance Your 1031 Property

Looking for a breakdown by property type — rentals, land, commercial, vacation homes, minerals, and entity-held property? See our 1031 exchange property types guide.