What Qualifies as a Like-Kind Exchange
"Like-kind" is one of the most misunderstood terms in 1031 exchanges. Most investors assume it means swapping similar properties (apartment for apartment, office for office). It actually means something much broader. This page explains what "like-kind" really means for real estate, what qualifies, what doesn't, and how a Delaware statutory trust fits into the rules.
What "Like-Kind" Really Means
Section 1031 of the Internal Revenue Code allows tax deferral when you exchange property held for investment or business use for property of “like-kind.” The IRS interprets that phrase broadly when it comes to real estate. “Like-kind” does not mean similar use, similar location, similar value, or similar property type. It means “of the same nature or character.”
For real estate, that interpretation makes most investment-purpose real property like-kind to most other investment-purpose real property. A single-family rental can be exchanged for a strip mall. Raw land can be exchanged for a medical office building. An apartment building can be exchanged for a warehouse. The IRS does not require the relinquished and replacement properties to be the same type, the same use, or in the same state. They simply both have to be real estate held for investment or business use.
That broad interpretation is what makes 1031 exchanges flexible enough to be useful. If “like-kind” required exact property matching, the rule would only work for landlords trading one rental for another rental. Instead, it works for almost any investor moving from one form of investment real estate to another.
Real Property Only: The 2017 TCJA Change
Before 2018, Section 1031 covered both real property and personal property. Investors could 1031-exchange business equipment, vehicles, livestock, art, and certain intangibles, in addition to real estate. The Tax Cuts and Jobs Act of 2017 (TCJA) narrowed Section 1031 to real property only, effective for exchanges completed after December 31, 2017.
Today, only real property held for investment or business use qualifies for a 1031 exchange. Equipment, art, vehicles, business goodwill, and intangible assets do not qualify, regardless of how they are held. This change matters for two reasons: it eliminated several common 1031 strategies that operating businesses used to rely on, and it made real estate 1031 exchanges relatively more important compared to other deferral strategies.
If you read pre-2018 articles or guides about 1031 exchanges, double-check that the property type they discuss is real estate. The personal-property rules they describe no longer apply.
What Real Estate Qualifies as Like-Kind
Most investment-purpose real estate qualifies as like-kind to most other investment-purpose real estate. The list below covers the property types that come up most often in 1031 exchanges. Each one can generally be exchanged for any other one on this list.
- Single-family rentals: Including condominiums, townhouses, duplexes, and small multifamily up to four units.
- Multifamily apartment buildings: Five units and up, including build-to-rent, student housing, and senior housing communities.
- Commercial office buildings: Including medical office, professional office, and mixed-use buildings.
- Retail buildings: Including single-tenant net-lease, multi-tenant strip centers, regional malls, and standalone retail.
- Industrial and warehouse property: Including last-mile distribution, light manufacturing, and logistics facilities.
- Hospitality property: Hotels, resorts, and short-term rental properties operated as commercial businesses (subject to specific rules around personal-use elements).
- Self-storage facilities: Standalone or part of a portfolio.
- Raw land: Held for investment, including agricultural land, timber land, and undeveloped parcels.
- DST beneficial interests: Under Revenue Ruling 2004-86, a beneficial interest in a properly structured Delaware statutory trust is treated as a direct interest in the underlying real estate. DST interests qualify as like-kind to other real estate.
- Tenant-in-common (TIC) interests: Where each TIC investor is on title to the property, the interest is treated as direct real property ownership and qualifies.
In short: if it’s real estate held for investment or business use, it almost certainly qualifies. The exceptions are narrower than the inclusions.
What Doesn't Qualify as Like-Kind
Several common assets look like real estate or relate to real estate but don’t qualify as like-kind property under Section 1031. Each one has a specific reason.
- Your primary residence: Section 1031 requires investment or business use. Personal use disqualifies the property. (Section 121 provides a different tax benefit for primary residences: up to $250,000 single or $500,000 married-filing-jointly of gain can be excluded if the home was your primary residence for 2 of the last 5 years.)
- A vacation home you don’t rent: Pure-personal-use vacation property doesn’t qualify. A vacation home with documented rental use can qualify under safe-harbor rules in Rev. Proc. 2008-16, but it requires careful documentation of rental days, personal-use days, and rental intent.
- Property held primarily for resale (“dealer property”): Real estate held in inventory for sale, including most flips, doesn’t qualify. The IRS uses a multi-factor test to determine dealer status, looking at frequency of sales, holding period, and primary purpose.
- REIT shares: Whether publicly traded or non-traded, REIT shares are treated as personal-property securities for tax purposes. The fact that the REIT holds real estate doesn’t make the shares like-kind to direct real estate.
- Limited partnership and LLC interests: Even when the underlying assets are real estate, partnership and LLC interests are treated as securities, not as direct real property. Multi-member LLC interests don’t qualify. Single-member LLCs (disregarded entities) are treated as direct ownership of the underlying property and can work, with careful structuring.
- Foreign real estate: U.S. real estate is not like-kind to foreign real estate under Section 1031. A property in California cannot be 1031-exchanged for a property in Mexico. Within the U.S., however, all 50 states (plus territories like Puerto Rico and the U.S. Virgin Islands) are like-kind to each other.
- Personal property and business equipment: After the 2017 TCJA change, only real property qualifies. Equipment, vehicles, art, livestock, business goodwill, franchise rights, and other personal-property categories no longer fall under Section 1031.
Edge Cases That Confuse Some People
A few specific situations come up often enough to deserve their own treatment. None of these has a one-size-fits-all answer, and each one is worth running through with your CPA before you commit to an exchange.
Mixed-use property (rental house with home office)
If you used a portion of an investment property for personal purposes, only the investment-use portion qualifies for 1031 treatment. The personal-use portion is treated as a separate transaction. Allocations should be supported by documentation (square footage, time of use, etc.).
Property held in a partnership or LLC
The same-taxpayer rule means the partnership or LLC must do the exchange, not the individual partners. If individual partners want to go their separate ways, they often need to “drop and swap” before the sale (distribute the property to the partners as tenants-in-common, then each partner exchanges their interest separately). This requires careful timing and tax planning. Talk to your CPA about whether the holding period after the drop is long enough to support investment intent.
Inherited property
Inherited real estate generally takes a stepped-up basis equal to the fair market value at the date of death. That step-up often eliminates the gain entirely, making a 1031 unnecessary. If you’ve inherited recently and are considering selling, run the basis math first. The step-up may have already done the work a 1031 would have done.
Conversion of personal residence to rental
A primary residence can sometimes be converted to a rental and then sold in a 1031 exchange, but the IRS looks for genuine investment intent. Generally, a 2-year rental period is considered defensible, though there is no statutory minimum. The conversion needs to be documented and the rental needs to be real (advertised, leased, reported as rental income).
Construction or improvement exchange
If you want to use 1031 proceeds to fund construction or significant improvements on the replacement property, this is sometimes possible through a more complex “construction exchange” or “improvement exchange” structure. The QI takes title to the replacement property during construction (parking it in a holding entity), construction is completed within the 180-day window, and then the property is transferred to you. These exchanges have specific timing and documentation requirements that not every QI can handle.
How a DST Fits Into the Like-Kind Rules
A Delaware statutory trust (DST) is a fractional real estate ownership structure. Investors hold a beneficial interest in the trust, and the trust holds title to the underlying real estate. Under standard tax rules, beneficial interests in trusts are typically treated as personal property, not as direct real estate. That would normally disqualify them from 1031 treatment.
Revenue Ruling 2004-86 carved out a specific exception for properly structured Delaware statutory trusts. The IRS held that a beneficial interest in a DST that satisfies seven specific conditions (often called the “seven deadly sins“) is treated as a direct interest in the underlying real property, not as a security. That treatment is what makes DST 1031 exchanges possible.
In practical terms: if you sell investment real estate, you can use the proceeds to acquire a DST beneficial interest, and the IRS will treat the exchange as like-kind real estate for real estate. The DST satisfies the like-kind requirement just like any other qualifying real estate. The other 1031 requirements (same-taxpayer, equal-or-greater-value-and-debt, 45-day identification, 180-day closing) all still apply.
