Like-kind is one of the most misunderstood terms in Section 1031, largely because it sounds like it should mean similar property types, an apartment building traded for another apartment building. In practice, like-kind is defined far more broadly for real property. A Milwaukee investor selling an industrial building along the I-94 corridor can exchange into a multifamily property in Wauwatosa, a retail center in Waukesha County, or raw land, because current rules treat essentially all real property held for investment or business use as like-kind to any other.
What Qualifies: Real Property Held for Investment or Business Use
The current standard, following the 2017 Tax Cuts and Jobs Act, limits 1031 treatment to real property, but within that category the definition of like-kind is broad by nature rather than by type. An office building, an industrial warehouse, a multifamily complex, farmland, and even certain leasehold interests of 30 years or more can all be like-kind to one another, as long as each property is held for productive use in a trade or business or for investment. The property type, class, and even the physical condition of the building do not matter for like-kind purposes; the holding purpose does.
What Changed in 2017: Personal Property No Longer Qualifies
Before the 2017 tax law change, personal property such as equipment, vehicles, and certain business assets could also qualify for 1031 treatment if exchanged for similar personal property. That option was eliminated, and Section 1031 now applies exclusively to real property. This is a common point of confusion for investors who researched the rule years ago or heard about it from a source describing the older law, and it matters directly when a sale includes bundled personal property, such as furniture, fixtures, and equipment sold along with a commercial building.
What Does Not Qualify as Like-Kind Real Property
Several categories of real property are specifically excluded from like-kind treatment, regardless of how the transaction is structured.
- a primary residence, since it is not held for investment or business use
- property held primarily for resale, such as inventory in a house-flipping business
- real property located outside the United States, when exchanged for domestic property
- stock, bonds, partnership interests, and other securities, even when they represent an interest in real estate
A Milwaukee investor who also flips residential property on the side needs to keep that inventory separate from any investment holdings being exchanged, since mixing the two can jeopardize the exchange.
Held For Investment or Business Use, Not Personal Use
The holding requirement is about intent and use, not the property's classification on a deed. A duplex an investor rents out to tenants qualifies; the same duplex converted into a personal residence does not. This distinction comes up in Milwaukee-area exchanges involving smaller multifamily buildings where an owner has, at some point, occupied one unit personally, which can complicate whether the entire property still counts as held for investment.
Vacant Land and Ground Leases Count Too
Because like-kind treatment for real property is so broad, an investor is not limited to exchanging an improved building for another improved building. Vacant land held for investment, a ground lease of sufficient length, and even certain easement interests can qualify as replacement property for a sold commercial building. This flexibility is useful for Milwaukee investors who may want to shift from an actively managed property, such as a retail center, into a lower-maintenance holding like ground-leased land, without losing the deferral.
Common 1031 Exchange Questions
Does an investor have to exchange into the same property type they sold?
No. Real property is broadly like-kind to other real property, so an industrial building can be exchanged for multifamily, retail, land, or another property type, as long as both are held for investment or business use.
Can equipment or vehicles still be exchanged under Section 1031?
No. Personal property exchanges were eliminated by the 2017 tax law change. Section 1031 now applies only to real property.
Does a primary residence qualify for a 1031 exchange?
No. A primary residence is not held for investment or business use, and it is excluded from like-kind treatment under Section 1031.
Is vacant land eligible as replacement property?
Yes, as long as it is held for investment purposes rather than personal use. Vacant land is treated as like-kind to improved real property.
What happens if a property sale includes both real estate and personal property, like equipment?
Only the real property portion can qualify for 1031 treatment. The personal property portion is generally treated as a separate, taxable sale.
Can a leasehold interest qualify as like-kind property?
Yes, if the lease term including renewal options is 30 years or longer. Shorter leasehold interests generally do not qualify.
