What Types of Property Qualify for a 1031 Exchange?

Conducting a 1031 exchange provides the opportunity to indefinitely defer federal income tax liability on capital gains from the sale of a qualifying property. By working with a 1031 exchange company, businesses and investors can maximize their ability to reinvest the gains from sales of qualifying properties—allowing them to generate additional revenue and build their portfolios more quickly over time.

But, this raises a critical question: What types of property qualify for a 1031 exchange?

Answering this question requires a bit of explanation. This is because various types of property can qualify in certain scenarios but not others. Then, there are types of property that do not qualify for a 1031 exchange under any circumstances. Here is an overview of what you need to know:

Types of Real Estate that Can Qualify for a 1031 Exchange

Under Section 1031 of the Internal Revenue Code, businesses and investors can defer tax on gains from real estate sales when they reinvest the proceeds in a like-kind property. However, this is not as restrictive as it initially sounds. As the Internal Revenue Service (IRS) explains:

“Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. . . . Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. . . . However, real property in the United States is not like-kind to real property outside the United States.”

Thus, essentially all types of real estate are considered to be of “like kind” with one another—as long as they are both located in the United States (or both located in a foreign country). This means that the types of real estate that can qualify for a 1031 exchange include, but are not limited to:

• Agricultural properties
• Apartment buildings
• Commercial real estate
• Industrial properties
• Medical facilities
• Office buildings
• Shopping centers and other retail properties
• Single-unit and multi-unit residential properties
• Vacant land
• Warehouses and other storage facilities

This provides businesses and investors with a substantial amount of flexibility when deciding where to reinvest the proceeds from the sale of a “relinquished” property. However, while the rules regarding eligible “replacement” properties are fairly lenient, other strict rules apply—and this makes it crucial to work closely with a qualified 1031 exchange company that can assist with meeting all applicable requirements.

The Real Property Must Be Used for Business or Investment Purposes

One of the other rules that apply to 1031 exchanges is that both properties involved in the exchange must be used for business or investment purposes. This means that primary residences, second homes and vacation homes generally do not qualify—although there are steps property owners can take to turn themselves into “investors” for purposes of conducting a 1031 exchange.

If you are interested in conducting a like-kind exchange with a property that does not currently qualify, you will want to work closely with a 1031 exchange company during the process. A qualified 1031 exchange company will be able to assist with documenting your efforts to comply with Section 1031—so that you are prepared to demonstrate compliance to the IRS if necessary.

Can You Conduct a 1031 Exchange with Personal Property?

Although it used to be possible to conduct a 1031 exchange with personal property, this is no longer the case. The Tax Cuts and Jobs Act eliminated like-kind exchange eligibility for personal property transactions in 2017. Today, the IRS makes abundantly clear that conducting a 1031 exchange with personal property is no longer an option:

“Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property.”

While there are exceptions, they are extremely limited—applying only to “certain exchanges of mutual ditch, reservoir or irrigation stock.” Other types of personal property, including furniture, equipment and other movable items, are not eligible, and including these in a real property transaction can result in “boot” that is subject to immediate federal taxation. However, even this can have benefits in some cases.

Contact 1031 National Services, A Qualified 1031 Exchange Company

Do you need to know more about conducting a 1031 exchange? If so, we invite you to contact us for a free phone consultation. We work with all types of businesses and real estate investors nationwide. To discuss your options with an experienced consultant at 1031 National Services in confidence, give us a call at 888-872-1031 or tell us how we can help online today.