List of Qualified Replacement Property Stocks

There is no official IRS list of qualified replacement property stocks. Section 1042 of the tax code sets criteria rather than naming names, and any security that meets those criteria counts. In practice, that means shares of most large publicly traded U.S. operating companies — manufacturers, retailers, tech firms, healthcare companies — can be purchased as QRP, along with corporate bonds, convertible bonds, preferred stock, and floating rate notes designed for this purpose. The judgment call is not finding an approved list; it is confirming that each issuer you buy passes the statute’s two tests.

What the Statute Counts as a Security

Section 1042(c)(4) defines QRP as any “security” issued by a domestic operating corporation. The word “security” borrows its meaning from Section 165(g)(2), which sweeps in a broad range of instruments.

Securities that qualify in practice include:

Common stock of U.S. operating companies, including shares listed on the NYSE or Nasdaq.
Preferred stock with voting or dividend rights, when the issuer qualifies.
Corporate bonds issued by a qualifying domestic corporation.
Convertible bonds exchangeable for stock in the same qualifying issuer.
Floating rate notes structured specifically as QRP-compliant instruments, commonly used in ESOP transactions.

Because the definition is criteria-based, a portfolio of blue-chip U.S. operating company stocks qualifies as readily as a single large corporate bond. You can mix and match, so long as each issuer independently passes the operating-corporation tests.

What Does Not Qualify

Several categories are off the table, either by explicit exclusion or because they fall outside the “security issued by a domestic operating corporation” framing.

Government securities are expressly excluded. Section 1042(c)(4)(D) strips bonds and other obligations issued by the federal government, states, and political subdivisions out of the QRP definition. Treasury bonds, municipal bonds, and agency debt all fail.¹

Beyond that, these do not qualify:

Mutual funds and ETFs. Shares in a pooled investment vehicle represent ownership in the fund, not direct securities of the underlying operating companies.
Real estate. Physical property is not a security at all.
Foreign stocks and bonds. The issuer must be a domestic U.S. corporation.
Stock of the selling company, or of any member of its controlled group under Section 1563(a)(1).¹

The controlled-group rule catches an edge case worth flagging. If the company sold to the ESOP has a parent corporation or sister subsidiaries, securities from those related entities are also off-limits.

The Two Issuer Tests Every Stock Must Pass

Not every U.S. corporation counts. The issuer must be a “domestic operating corporation,” which the statute defines through two specific tests applied to the issuer’s own balance sheet and income.

Active-Business Asset Test

More than 50% of the corporation’s assets must be used in the active conduct of a trade or business at the time you purchase the security, or before the replacement period closes.¹ This disqualifies shell companies, holding companies whose primary function is managing investments, and entities that mainly hold undeveloped land or passive assets. Banks described in Section 581 and insurance companies taxed under Subchapter L automatically count as operating corporations, even though their balance sheets are heavy with financial assets.

Passive-Income Ceiling

The issuing corporation cannot have derived more than 25% of its gross receipts from passive investment income during the tax year before you purchased the security.¹ Passive investment income here means royalties, rents, dividends, interest, and annuities, as defined in Section 1362(d)(3)(C).² A company that earns most of its revenue from operations but collects some investment income on the side will usually pass. One that sits on a portfolio generating dividends and interest as its main business will not.

How to Vet a Specific Stock

Before buying any security as QRP, confirm from the issuer’s financial statements that passive sources did not exceed the 25% threshold in the prior tax year, and that more than half of its assets are deployed in an active trade or business. Most large publicly traded operating companies pass both tests easily. Risk rises with smaller or less conventional issuers, particularly those with large investment portfolios relative to operating assets, and with real-estate-heavy businesses whose rental income can push past the passive-income ceiling.

There is no pre-clearance process. You, not the IRS, make the determination at the time of purchase, and you keep the documentation that supports it.

Two Common Portfolio Approaches

Sellers generally take one of two paths with QRP: a diversified portfolio of individual stocks and bonds, or floating rate notes. The right choice depends on liquidity needs, risk tolerance, and expected holding period.

Diversified Stock and Bond Portfolio

You can buy shares of individual publicly traded U.S. operating companies and hold them as QRP, mixing in corporate bonds if you want fixed income. This lets you build a portfolio tailored to your investment goals — growth stocks, dividend-paying blue chips, or a balanced allocation — while generating dividend and interest income during the deferral. Concentration risk is real if you hold only a handful of names, and you cannot freely trade in and out of positions without triggering recapture on whatever you sell.

Floating Rate Notes

Floating rate notes are corporate bonds with variable interest rates, often structured specifically for Section 1042 transactions. Their appeal is leverage. Because FRNs are marginable, banks will typically lend up to 90% of the note’s face value, letting you purchase QRP equal to 100% of your taxable gain with a relatively small cash outlay. That matters because in many ESOP transactions, the seller receives only about 25% of the sale price in cash at closing, with the rest arriving over time through a seller note.

The trade-off is that the margin loan becomes a long-term commitment. It carries ongoing interest, requires a personal guarantee, and is rarely fully repaid during the seller’s lifetime. FRNs also generate less long-term return than a well-constructed equity portfolio. Sellers who want immediate access to cash often prefer FRNs. Sellers comfortable with buy-and-hold often prefer a stock portfolio that can grow over time and pass to heirs with a stepped-up basis.

Why Your Choice of QRP Is a Long-Term Decision

The Section 1042 deferral is a postponement, not an elimination. When you purchase QRP, its basis is reduced by the gain you deferred. Sell $5 million of company stock with a $1 million basis, invest the full $5 million in QRP, and your new QRP has a basis of only $1 million.¹

Section 1042(e) then provides that gain is recognized on any disposition of QRP to the extent of the deferred amount.¹ There is no holding period after which recapture disappears. Selling a portion of your QRP triggers a proportionate share of the deferred gain. That is why the stocks you choose matter: once purchased, they are not easy to rotate out of without tax cost.

There is also a less obvious trap. If the corporation that issued your QRP disposes of a substantial portion of its assets outside the ordinary course of business, and you own stock representing control of that corporation, you are treated as having disposed of the QRP yourself. Concentrated positions in companies you control carry a risk a diversified portfolio of minority positions in large public companies does not.

Several events do not trigger recapture:

Death. The QRP receives a stepped-up basis and the deferred gain is never recognized.
Gifts. The transfer does not trigger recapture, but the recipient takes your carryover basis and inherits the deferred gain exposure.
Certain tax-free reorganizations under Section 368, when the seller does not control the acquiring or acquired corporation while holding substituted-basis property.
A disposition that itself qualifies for a new Section 1042 deferral.

The death exception is why QRP is often described as a hold-forever strategy. A seller who never disposes of the QRP during their lifetime eliminates the deferred capital gains tax entirely through the basis step-up at death. That reality should shape the list of stocks you build: securities you are willing to hold for decades, from issuers large and stable enough that the active-business and passive-income tests are not going to become a problem years down the road.

1
Office of the Law Revision Counsel. 26 U.S. Code 1042 – Sales of Stock to Employee Stock Ownership Plans or Certain Cooperatives
2
Office of the Law Revision Counsel. 26 U.S. Code 1362 – Election; Revocation; Termination