Nearly any real estate held for business or investment counts as like-kind property under Section 1031 of the Internal Revenue Code, provided it is exchanged for other real estate also held for business or investment. A vacant lot is like-kind to an office tower. A farm is like-kind to a warehouse. A single-family rental is like-kind to a strip mall. The category is broad on purpose, but the exchange only works if both properties are real property located in the United States, and neither is a personal residence or held primarily for resale.
What “Like-Kind” Actually Means for Real Estate
The phrase sounds restrictive, and that is where most confusion starts. Federal regulations define like-kind by the nature or character of the property, not its grade, quality, or physical condition. The comparison happens at the level of “is this real estate held for the right purpose?” rather than “is this the same type of real estate?”
So an investor can trade unimproved farmland for a fully developed apartment complex and defer the entire capital gain. A warehouse owner can exchange into a retail storefront. A landlord with a duplex can swap into a fractional interest in an office building. The tax code treats all of these as equivalent because the underlying asset is the same thing: real property held for productive use.
What Qualifies as Real Property
Before 2018, Section 1031 covered many types of property, including equipment, vehicles, and artwork. The Tax Cuts and Jobs Act narrowed it to real property only, effective for transactions completed after December 31, 2017. Anything other than real estate is now outside Section 1031.
That change put a lot of weight on what “real property” means. Treasury finalized regulations in 2020 spelling it out, and the categories are broader than most investors expect:
- Land itself, including the air space above it, water rights, and unsevered natural products such as growing crops, timber, mines, and wells.
- Buildings permanently affixed to land: houses, apartments, hotels, factories, office buildings, warehouses, barns, enclosed garages, stores, and enclosed stadiums, among others.
- Other permanent structures, including in-ground swimming pools, roads, bridges, tunnels, paved parking areas, fences, oil and gas pipelines, cell towers, power transmission facilities, grain silos, and railroad tracks.
- Structural components of a permanent structure: walls, wiring, plumbing, HVAC systems, elevators, fire suppression systems, security systems, floors, ceilings, and insulation.
- Intangible real property interests: fee ownership, co-ownership, leaseholds, easements, options to acquire real property, stock in cooperative housing corporations, and land development rights.
- Licenses and permits that exist solely for the use or occupation of land or a permanent structure and function like a leasehold or easement.
The controlling test is whether the item is permanently affixed and will ordinarily remain affixed for an indefinite period. A built-in commercial kitchen is a structural component. A freestanding appliance you could wheel out the door is not.
The Business or Investment Use Requirement
Real property alone is not enough. Section 1031(a)(1) requires that both the property you give up and the property you receive be held for productive use in a trade or business or for investment. The IRS looks at your actual conduct and intent, not just the label on paper.
Investment intent usually shows up as a track record: collecting rental income, managing the property for appreciation, or using it in business operations. Buy a property and flip it within a few months, and the IRS is likely to treat you as a dealer rather than an investor. Dealer property does not qualify. No statute sets a minimum holding period, but most tax professionals recommend holding for at least one to two years to build a credible record of investment intent.
Vacation Homes and Mixed-Use Properties
Vacation properties are the gray area. A beach house used only for family trips is personal use, not investment, and does not qualify. Rent it out and limit your own stays, and it can. Revenue Procedure 2008-16 provides a safe harbor that treats the property as investment-held if, for both the relinquished and the replacement property, all of the following are true during the 24 months immediately before and after the exchange:
- The property is rented to another person at fair market rent for at least 14 days in each 12-month period.
- Your personal use does not exceed the greater of 14 days or 10% of the days the property was rented at fair market rent during each 12-month period.
Miss either threshold and you fall outside the safe harbor. That is not an automatic disqualification, but you lose the presumption of investment use and would have to prove intent on the overall facts.
Property That Does Not Qualify
Several categories are excluded even when they otherwise look like real estate.
Property held primarily for sale. This is the largest practical exclusion. If you develop or flip properties as a business, those properties are inventory rather than investment. Gains are taxed as ordinary income, and Section 1031 does not apply. The line between a long-term investor who occasionally sells and a dealer who buys to resell is fact-specific, and the IRS weighs factors like the frequency of sales, how long you held the property, and how much effort went into marketing it.
Primary residences. Your main home is not investment property because you live in it. Homeowners looking for tax relief on the sale of a principal residence use a different provision, Section 121, which can exclude up to $250,000 in gain, or $500,000 for married couples filing jointly.
Partnership interests. Section 1031 specifically excludes interests in a partnership. This trips up investors in real estate ventures structured as partnerships or multi-member LLCs taxed as partnerships. You cannot exchange your partnership interest in one venture for an interest in another and defer the gain. Tenants-in-common interests and Delaware Statutory Trust interests are structured differently and can qualify.
Personal property. Since 2018, equipment, vehicles, furniture, artwork, collectibles, and all other non-real-property assets are outside Section 1031.
Domestic Property Only
Section 1031(h) draws a hard geographic line: real property located in the United States is not like-kind to real property located outside the United States. You cannot sell a domestic rental, buy a villa overseas, and defer the gain. The rule runs both ways; a foreign investor selling U.S. property must reinvest in other U.S. real estate to keep the deferral. “United States” for this purpose means the 50 states and the District of Columbia.
Fractional Ownership: TICs and DSTs
You do not need to own an entire property to use Section 1031. Two structures let investors hold a fractional interest that the IRS treats as direct ownership of real property rather than as an excluded partnership or security interest.
Tenants-in-Common Interests
In a tenants-in-common (TIC) arrangement, multiple investors each hold an undivided, deeded interest in a single property. Each co-owner’s share is treated as direct ownership of real estate for 1031 purposes. Revenue Procedure 2002-22 sets out fifteen conditions the IRS uses to distinguish a genuine co-ownership from a disguised partnership, and the distinction matters because partnership interests do not qualify.
Delaware Statutory Trusts
A Delaware Statutory Trust (DST) holds title to real estate while investors own beneficial interests in the trust. Revenue Ruling 2004-86 established that a DST interest is treated as a direct interest in the underlying real property rather than as an excluded certificate of trust. DSTs appeal to investors who want passive exposure to institutional properties, such as large apartment complexes, medical office buildings, or industrial parks, without direct management responsibilities.
Exchanging With a Related Party
You can exchange property with a family member or an entity you control, but Section 1031(f) imposes a two-year holding requirement. If either you or the related party disposes of the property received within two years of the last transfer, the deferral is retroactively disqualified and the gain becomes taxable in the year of disposition. Related parties include parents, children, siblings, grandchildren, grandparents, and entities in which the taxpayer holds a significant ownership interest.
The IRS also applies an anti-abuse rule. If the exchange is structured to sidestep the two-year requirement, the deferral fails regardless of how long the parties hold.
Confirming a Property Qualifies Before You Commit
Working through the qualification analysis before the deal moves is the practical safeguard. Confirm the asset falls within the 2020 regulations’ definition of real property. Confirm both sides of the exchange are held for business or investment, not for personal use or resale. Confirm both properties sit inside the United States. If a vacation property is involved, run the 14-day and 10% numbers against the last 24 months. If a co-ownership structure is involved, confirm it is a TIC or DST rather than a partnership. And if the other party is a relative or a controlled entity, plan for the two-year holding period on both sides. The like-kind standard for real estate is generous, but the surrounding conditions are strict, and each one has to hold before Section 1031 will carry the gain forward.