Real Property

To qualify for a Section 1031 Exchange, real estate (i) must be considered real property under applicable state law, and (ii) both the relinquished and the replacement properties must be ‘held for productive use in a trade or business, or for investment.’ 

Real property is generally defined as land and the structures that are permanently affixed to it. Examples of real property include:

• raw land
• residential property
• property held for investment, such as apartments, office buildings, and shopping centers
• commercial property used in the taxpayer's business, such as industrial property, motels and hotels, recreational parks, and mobile home and RV parks
• agricultural property used for the production of crops or livestock

Real property also includes the natural resources that might accompany the land such as timber, coal, oil and gas, and minerals.

Under Section 1031, all real property (as it is defined by state law) is considered "like-kind" with other real property of the same nature and quality. The following are examples of qualified "like-kind" real property exchanges:

• Raw land for rental property
• Single family rental for multi-family rental
• Retail space for motel/hotel
• Farms/ranch for golf course
• 30-year leasehold interest for fee simple interest

• Non-income producing raw land for income-producing rental property

• A Tenant-in-Common ("TIC") interest is a qualifying ‘business or investment’ property for a fee simple interest

Real property located within the 50 States and the U.S. Virgin Islands is not considered "like-kind" with real property located outside of these areas.

Second or vacation homes may or may not qualify for a Section 1031 Exchange, depending on how the property is used by the taxpayer.  Significant personal use of the second home may violate the ‘used in a trade or business, or held for investment’ requirement, and thus disqualify the property for an exchange.