Can I Use a 1031 Exchange for Personal Property, or Is It Only for Real Estate?

The short answer: only real estate. Since January 1, 2018, Section 1031 applies to real property held for investment or for use in a business. Personal property no longer qualifies.

This question still comes up, usually because older articles, and some advisors who learned the rules before 2018, still describe the old law.

What changed

Before 2018, business owners could exchange equipment, vehicles, aircraft and other personal property used in their business. The Tax Cuts and Jobs Act ended that for exchanges completed after December 31, 2017. Today, the exchange rules cover real property only.

That means none of the following qualify, even if they're used in your business:

• Equipment and machinery

• Vehicles, trucks and aircraft

• Artwork and collectibles

• Furniture, and other personal property

Ownership interests don't qualify either. Stock, partnership interests and LLC membership interests have never been eligible for a 1031 exchange.

What still qualifies

Real property held for investment or business use still qualifies, and the definition of like-kind is broad. A rental house can be exchanged for an apartment building, raw land for a retail center, or an office building for an industrial property. What matters is how the property is held, not what type of real estate it is.

Selling a business that owns real estate

This is where the change matters most. If you're selling a business and the sale includes the building, the real estate portion can still be exchanged. The equipment, inventory, goodwill and other assets in the sale can't.

In practice, the purchase agreement should allocate the price between the real estate and everything else. Only the real estate proceeds go into the exchange. The rest is taxed as a normal sale. Your CPA and attorney should be involved early so the allocation is done correctly.

Personal property included with real estate

Sometimes a real estate sale includes some personal property, like appliances in a rental or furniture in a short-term rental. When the personal property is a minor part of the deal, it's usually handled within the purchase price without much issue. When it's significant, it needs to be valued and treated separately. If you're unsure which category your situation falls into, ask your CPA before you go under contract.

Getting started

If you're selling investment or business real estate and want to defer the gain, the first step is the same as always: get your exchange set up before your sale closes. Connect us with your closing agent, and we'll coordinate the exchange documents with them.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.