Guides

Like-Kind Property Explained

Like-kind property is the foundational eligibility test for a 1031 exchange, and the definition changed meaningfully under the Tax Cuts and Jobs Act, which took effect for exchanges completed after December 31, 2017. Before that change, personal property such as aircraft, equipment, franchise licenses, and vehicles could sometimes qualify for exchange treatment alongside real property. Since the change, only real property held for productive use in a trade or business or for investment is eligible; personal property exchanges no longer qualify under Section 1031 at all. Within real property, however, the like-kind standard is intentionally broad. Real property is generally considered like-kind to any other real property, regardless of grade, quality, or improvement level, as long as both the relinquished and replacement assets are held for business or investment purposes rather than personal use. This means an investor can exchange raw, unimproved land for a stabilized apartment building, or a single retail pad for an industrial warehouse, or a medical office building for a portfolio of net-leased retail assets, all within the same exchange, provided the underlying use test is satisfied on both ends. What disqualifies a property is not its type but its purpose. A primary residence does not qualify, because it is not held for business or investment use. Property held primarily for sale, sometimes called dealer property, such as a fix-and-flip renovation or a subdivided lot inventory held by a builder, also does not qualify, because it is treated as stock in trade rather than an investment asset. Geography carries a limit as well: real property located within the United States is not considered like-kind to real property located outside the United States, so a foreign property cannot serve as either the relinquished or replacement side of a domestic exchange. For Seattle, WA investors, this breadth is genuinely useful, since it allows a single-family rental portfolio to convert into commercial real estate, or a Puget Sound multifamily holding to convert into out-of-state industrial property, without the exchange failing on a like-kind technicality, so long as both properties are held for qualifying business or investment purposes. Mixed-use properties, where a portion of the building is owner-occupied and a portion is leased to tenants, add a layer of nuance, since only the business or investment portion of the property typically qualifies for exchange treatment, and the owner-occupied portion generally does not. Vacation or second homes occupy a similarly gray area; the Internal Revenue Service has issued safe harbor guidance describing rental usage and limited personal use thresholds that, if satisfied for a sustained period before and after the exchange, can support treating a vacation property as held for investment rather than personal use.