1031 Exchange Property Types: What Qualifies and What Doesn’t

One of the major components in a 1031 exchange is replacing one property with another of the same kind. How do you know what property qualifies and what doesn’t? Here is a closer look. 

What is a 1031 Exchange?

A 1031 exchange is an option the IRS provides that allows you to defer capital gains while you exchange one investment property for another of equal or greater value. To take advantage of this, you must adhere to specific timelines and have a Qualified Intermediary, such as an experienced title company, to facilitate the transaction.

For instance, once you decide to sell a piece of investment property, you have 45 days from the sale date to find a like-kind property. How do you know what qualifies as this type of property? Here is how the IRS explains “like-kind” on their website: 

“Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.”

The properties do not have to be the same type of property. For instance, a retail space doesn’t have to be exchanged for a retail space. They just need to be used for business, investment, or production. 

Let’s take a look at what property types qualify. 

What Types of Property Qualify for a 1031 Exchange? 

Most investment properties that generate income or appreciation will qualify as properties that can be used in a 1031 exchange. The list below includes a few of the most common types seen in these transactions. However, it is important to note that this is not an exhaustive list.  

• Residential rental property

• Commercial real estate

• Vacant land

• Farmland

• Industrial property

• Retail property

• Apartment buildings

• Multi-Family property

A few other things that can be considered for like-kind exchanges even though they aren’t exactly property include: 

• Water, air, and mineral rights

• Oil and gas interest

• Large equipment and machinery

What Types of Property Do Not Qualify? 

Most properties for investment will qualify as a like-kind property in this type of exchange. After all, the term is rather broad. There are still a few properties that will not qualify due to the limits and restrictions set forth by the details of the Internal Revenue Code Section 1031. These properties include: 

• Primary residence

• A second home

• Flip properties

• Inventory and supplies

• Securities and financial instruments

• Intangible assets

• Partnership interests

Personal property, such as automobiles, boats, artwork, and jewelry, will also not qualify for this type of savings in capital gains as they are not allowed.

Again, this is not an exhaustive list. If you are unsure whether or not a property will qualify, it is always a good idea to work with an experienced title company. 

Learn More About Your 1031 Exchange

The title agents at Blue Note Title, LLC have successfully handled many 1031 exchange transactions. We can answer your questions, help you adhere to your timeline, and properly document the process. 

Are you interested in saving money by avoiding capital gains? Contact us today to get started.