What Properties Qualify for a 1031 Exchange?

If you’re considering a 1031 exchange, understanding which 1031 exchange properties qualify is essential for ensuring the success of your transaction. A 1031 exchange is a tax-deferral strategy under the Internal Revenue Code (IRC) Section 1031, allowing investors to defer capital gains taxes when exchanging one investment property for another of “like-kind.” But what exactly qualifies as “like-kind,” and what types of properties are eligible?

This guide will break down the requirements for what properties qualify for a 1031 exchange, so you can confidently move forward with your investment plans.

General Requirements for a 1031 Exchange Property

For a property to qualify for a 1031 exchange, it must meet the following criteria:

1. Business or Investment Purpose

The relinquished property (the one being sold) and the replacement property (the one being acquired) must both be held for business or investment purposes. Personal-use properties, such as a primary residence, do not qualify. Examples of eligible properties include:

• Rental properties

• Commercial buildings

• Farmland

• Industrial properties

• Vacant land held for investment

2. Like-Kind Property

The IRS defines “like-kind” broadly. Properties do not have to be identical but must be used for investment or business purposes. Examples of 1031 exchange properties that may qualify:

• An office building for a retail property

• A rental home for a multi-family apartment complex

• Vacant land for a commercial property

3. U.S.-Based Properties

Both the relinquished and replacement properties must be located within the United States. Foreign properties do not qualify under 1031 exchange rules.

Types of Properties That Qualify for a 1031 Exchange

1. Residential Investment Properties

Single-family rental homes, vacation rentals, and multi-family units can qualify if they are not used as a primary residence. Vacation rental properties must be rented out for the majority of the year and held primarily for investment purposes.

2. Commercial Properties

Commercial real estate, including office buildings, retail centers, warehouses, and industrial properties, is a common choice for 1031 exchange properties. These properties can be exchanged for other commercial investments or upgraded facilities.

3. Raw Land

Vacant land qualifies as long as it is held for investment purposes. Many investors exchange raw land for income-generating properties, such as commercial buildings.

4. Mixed-Use Properties

Buildings with both residential and commercial uses—such as those with ground-floor retail spaces and apartments above—can qualify if primarily used for business or investment.

5. Industrial Properties

Factories, warehouses, and manufacturing plants qualify for a 1031 exchange when exchanged for other industrial or investment properties.

6. Oil, Gas, and Mineral Rights

Some oil, gas, and mineral rights can qualify if considered real property under state law.

Properties That Do Not Qualify for a 1031 Exchange

While the 1031 exchange offers numerous opportunities, certain properties do not qualify:

1. Primary Residences

Primary residences are not considered investment properties and do not qualify. However, homeowners may use the Section 121 exclusion to avoid taxes on a portion of their capital gains.

2. Flipped Properties

Properties purchased, renovated, and quickly resold (house flipping) do not qualify since they are considered inventory, not investments.

3. Personal-Use Properties

Vacation homes used primarily for personal enjoyment do not qualify unless converted into rental properties and meet specific IRS requirements.

4. Foreign Properties

Both the relinquished and replacement properties must be U.S.-based to qualify for a 1031 exchange.

Timeframes and Deadlines for a 1031 Exchange

To benefit from a 1031 exchange, investors must follow strict IRS deadlines:

• 45-Day Identification Period: Within 45 days of selling the relinquished property, investors must identify potential replacement properties in writing and submit the list to their Qualified Intermediary (QI).

• 180-Day Exchange Period: Investors must close on the replacement property within 180 days of selling the relinquished property.

These timeframes are non-negotiable, so it's important to work closely with an experienced qualified intermediary to ensure compliance.

The Role of a Qualified Intermediary (QI)

A Qualified Intermediary (QI) is a required third party who facilitates the exchange by holding funds and ensuring compliance with IRS rules. Without a QI, a 1031 exchange is not valid.

When selecting a Qualified Intermediary, look for:

• Expertise in 1031 exchanges

• A proven track record

• Exceptional customer service

• Transparent pricing

At APX 1031, we simplify the exchange process, ensuring all legal and financial aspects are handled professionally, with clear communication to take the stress out of your exchange.

How APX 1031 Can Help

Understanding what properties qualify for a 1031 exchange can be complex, but APX 1031 makes the process simple and stress-free. Our expert team specializes in helping investors across the U.S. navigate 1031 exchanges, ensuring IRS compliance and maximizing tax deferral benefits.

Whether you’re looking to upgrade your portfolio, diversify investments, or defer capital gains taxes, we’re here to help tailor a strategy that's right for you.

Contact APX 1031 today to simplify your next 1031 exchange and achieve your investment goals with ease and confidence!