What Kind of Property Works for a 1031 Exchange?

Understanding what properties work for a 1031 Exchange is crucial for planning your transactions effectively. Prior to 2020, a 1031 Exchange could be completed on a wide variety of business or personal property. For example, if you owned a construction company, you could sell your old dump truck under a 1031 Exchange and defer capital gains. This was possible if you would be purchasing another dump truck within a certain period of time. This illustrates what properties work for a 1031 Exchange back then.

However, in recent years, Congress has tightened up the 1031 Exchange process and has limited its use solely to “like-kind” real estate. It’s vital to know what properties work for 1031 exchange under these new rules. This is important for successful real estate investment.

While that’s bad news for people in other sectors, the game is still in play for real estate investors. They are looking to lower their tax burden and use their extra money to grow their personal wealth. Hence, knowing which properties are suitable for a 1031 Exchange helps in strategic financial planning.

However, even with all the new legislation, a common source of confusion still centers around what “like-kind” really means when it comes to the real estate category. It’s obviously very broad and encompasses everything from the family home you may live in, to raw land and mineral interests.

The general rule is that property that’s eligible for a 1031 Exchange is that which is used for business, trade, or commercial purposes. What is not covered is property that’s for personal use, such as your family home or real estate used primarily as a vacation property or second home.

Like-Kind Does Not Mean Identical

Another source of confusion is whether “like-kind” properties must be identical to each other. The answer to this is NO. All real estate that falls within the business, trade, or commercial category is considered “like-kind” to each other. For example, a single-family rental property is considered “like-kind” to a warehouse by the IRS. It’s a very broad category. Almost anything qualifies as “like-kind” that can be used for business or for 1031 Exchange investment purposes, including:

• Farmland
• Blank lots
• Air BnB’s
• A vacation home if they are used less than 14 days for personal use
• Some leasehold interests
• Hotels
• Duplexes
• Apartment buildings
• Commercial Warehouses
• Oil and gas leases
  

Finally, property in one state is also considered “like-kind” to property in another. Both properties simply need to be in the United States to complete a 1031 Exchange under the current IRS rules.

Have Questions About “Like-Kind” Properties?

Our Exchange Agents know that each transaction is different, and you may still have questions. You might wonder whether the property you are thinking about exchanging would be eligible for the tax-deferred benefits offered by a 1031 Exchange. Figuring out what properties work for a 1031 Exchange might be complicated. If you’re still unsure, simply call us at (888) 508-1901. We’d be happy to talk to you about your portfolio. We can help you determine how to move forward in the most tax-efficient way possible.

Find out more helpful 1031 exchange information here:

• What is a 1031 Exchange?
• 1031 Exchange on Your Personal Residence? Not So Fast, But There Might Be a Way
• Guiding Clients Through 1031 Exchanges: A Primer for Real Estate Agents
• Do I Have to Choose a Rental Replacement Property with the Same Amount of Units When Doing a 1031 Exchange?
• Can I Buy Any Property Type I Want in a 1031 Exchange?