Like-kind is one of the most misunderstood phrases in the entire exchange process, mostly because it sounds like it should mean similar. In practice, like-kind for real property is defined broadly: almost any real property held for investment or business use can be exchanged for almost any other real property held for investment or business use, regardless of type, size, or location within the United States.
What Qualifies Under the Broad Real Property Standard
A New Orleans investor can exchange a Garden District rental duplex for an industrial warehouse near the river, a self-storage facility, a medical office building, or raw land, and all of it satisfies like-kind so long as both properties are held for investment or use in a trade or business rather than personal use. The comparison is between the nature of the property right, real property for real property, not between the type of building or its intended use.
What Does Not Qualify
A primary residence does not qualify, since it is held for personal use rather than investment. A second home used mostly for personal enjoyment, with only incidental rental activity, generally fails as well unless it meets specific safe harbor rental-use requirements. Property held primarily for resale, meaning inventory such as a builder's spec homes or a flipper's rehab project, does not qualify either, because that property is treated as held for sale rather than for investment.
Personal Property Lost Eligibility in 2017
Before the 2017 Tax Cuts and Jobs Act, like-kind exchange treatment extended to certain personal property as well, including equipment, vehicles, and some intangible business assets. That changed starting with the 2018 tax year, when Congress limited Section 1031 to real property only. An investor selling a commercial building that includes fixtures, equipment, or furniture, common on a hotel or self-storage sale, now needs to separate the real property proceeds from the personal property proceeds, since only the real property side can be exchanged and the personal property portion is simply a taxable sale.
Foreign Property and Other Limits
Real property inside the United States cannot be exchanged for real property outside the United States, and the reverse is also true, foreign real property can only be exchanged for other foreign real property. A leasehold interest can qualify as like-kind real property if the remaining lease term, including renewal options, runs 30 years or longer, which occasionally matters on ground lease transactions in denser parts of the city where fee-simple land is scarce.
Mineral, Air, and Other Property Interests
Certain interests that are not obviously buildings or land can still qualify as like-kind real property, including mineral rights, water rights, and air rights, as long as they are treated as real property interests under the state law where the property sits. Louisiana's mineral servitude system treats mineral rights as a distinct real right, which generally supports like-kind treatment for a mineral servitude exchanged for another qualifying real property interest, though the specifics depend on how the servitude is structured and should be confirmed with tax counsel before the exchange is built around it.
Trading Across Very Different Asset Classes
Because the like-kind standard is so broad for real property, investors regularly restructure their entire portfolio through a single exchange rather than simply replacing one property with a similar one. A landlord tired of managing a scattered set of Uptown rental doubles can exchange into a single triple net retail building with a corporate tenant, trading active management for a passive income stream, all inside the same 1031 framework that a straightforward like-kind swap would use.
The same broad standard covers a Delaware statutory trust interest, a fractional real property investment vehicle that qualifies as like-kind real property for exchange purposes despite looking, at first glance, more like a security than a deed. Investors weighing active ownership against a passive DST allocation are still working inside the same like-kind framework, just choosing between very different levels of hands-on involvement.
Common 1031 Exchange Questions
Does a rental property have to be the same type as the property being sold?
No. Like-kind for real property is broad. An apartment building, retail center, industrial parcel, or raw land can all be exchanged for one another, as long as both are held for investment or business use.
Can a primary residence be sold and replaced through a 1031 exchange?
No. A primary residence is held for personal use, not investment, so it does not qualify for 1031 treatment. A separate tax provision, the primary residence exclusion, applies instead.
Did the rules for like-kind property change recently?
Yes. Since the 2018 tax year, personal property such as equipment and vehicles no longer qualifies for like-kind exchange treatment. Only real property qualifies now.
Can a New Orleans investor exchange into property in another state?
Yes. Like-kind real property can be located anywhere within the United States. There is no requirement that the replacement property sit in the same state or region as the relinquished property.
Does a long-term ground lease count as like-kind real property?
It can. A leasehold interest with 30 years or more remaining, including renewal options, is generally treated as like-kind to a fee-simple real property interest.
What happens to fixtures and equipment included in a commercial property sale?
Since personal property no longer qualifies for exchange treatment, proceeds attributable to fixtures, equipment, or furniture included in the sale are generally treated as a separate taxable transaction.
