What Properties Qualify for a 1031 Exchange?

A property qualifies for a 1031 exchange when it's real estate held for investment or for use in a trade or business. The property you sell and the property you buy both have to meet that test.

The good news is that "like-kind" is broad. It refers to the nature of the property, not its quality or type. Almost any U.S. investment real estate can be exchanged for almost any other U.S. investment real estate.

Properties that typically qualify

• Single-family and multifamily rentals

• Office, retail and industrial buildings

• Vacant land held for investment

• Farmland and ranch land

• Mixed-use buildings

• Triple-net leased properties

• Fractional interests such as Delaware Statutory Trusts (DSTs) and tenant-in-common interests

• Certain interests treated as real property under state law, such as some long-term leases and mineral rights

You can move between these freely. A rental house can be exchanged for vacant land, and an apartment building for a retail center.

Properties that don't qualify

Your primary residence. A home you live in isn't held for investment. When you sell a primary residence, the home-sale exclusion under Section 121 may apply instead.

Property held for resale. Homes bought to fix and flip, or lots developed for sale, are treated as inventory, not investments.

Personal property. Since 2018, equipment, vehicles, artwork and other personal property no longer qualify, even when used in a business.

Ownership interests. Stock, partnership interests and LLC membership interests don't qualify. The real estate the entity owns can be exchanged by the entity, but your interest in the entity can't.

Situations that need a closer look

Vacation and second homes. A property you mostly use yourself doesn't qualify. The IRS has a safe harbor for vacation properties: rent it at fair market value for at least 14 days a year, and keep your personal use to 14 days or 10% of the days it's rented, whichever is greater. That test applies in each of the two years before you sell, and in the two years after you buy a replacement you plan to use the same way.

Mixed-use property. If you live in one unit and rent the others, the rented portion can be exchanged and your residence portion can't. The sale is split between the two, and your residence portion may qualify for the home-sale exclusion.

Foreign property. U.S. real estate can only be exchanged for U.S. real estate, and foreign real estate only for foreign real estate. You can't sell a rental in San Diego and buy a rental in Mexico as a 1031 exchange.

Property held by an entity. The same taxpayer that sells the relinquished property generally needs to buy the replacement property. If an LLC owns the property you're selling, the LLC typically needs to be the buyer, too.

How long do you need to hold the property?

There's no fixed holding period in the tax code. What matters is your intent to hold the property for investment when you sell it and when you buy the replacement. Many advisors suggest holding for at least a year or two, but your CPA can give you guidance specific to your situation.

Not sure if your property qualifies?

If you're unsure, ask early, before you go under contract. A quick call with us and your CPA can save a lot of trouble later.

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