After two decades in the 1031 exchange game, I’ve noticed one thing hasn’t changed: the term “Like-Kind” is a total head-scratcher for many. It’s the foundation of Section 1031, but the language itself is somewhat of a trap. When most people hear it, they instantly think they have to find an identical, physical match for the property they’re selling.
The truth is way simpler, and once an investor gets this one thing, it usually changes their entire strategy.
It’s About Purpose, Not Property Type
The most stubborn myth is that if you sell a certain asset, say, an apartment building then the IRS requires you to buy another apartment building. Not true.
Under Section 1031, “like-kind” is all about the nature or character of the property, not the quality or how it functions. The Treasury Regulations basically say that one piece of investment real estate is “like-kind” to any other piece of real property held for business or investment.
This rule is surprisingly flexible. You’re not looking for a property’s twin; you’re just looking for a different investment property.
The Crucial Requirement: Held for Investment
To truly understand the flexibility of the like-kind rule, you have to look back at the core intent of Section 1031: to defer capital gains tax when an investor’s equity simply remains invested in real estate. It’s not a loophole for personal wealth—it’s a tool to promote capital deployment in business and investment assets.
This is why the key phrase is “held for business or investment.” This requirement is non-negotiable. If you sell a property and move the equity into something that doesn’t meet this standard, the exchange fails. The property you sell, called the Relinquished Property, and the property you buy, called the Replacement Property, must both be held with this intent. This immediately excludes personal-use assets, such as your primary residence or a vacation home you don’t rent out, from qualifying for the tax deferral.
What Counts as “Like-Kind”? (It’s Broad)
Because the focus is on “investment real estate” as a category, these trades are all perfectly valid:
- Residential to Commercial: Swap a single-family rental for a professional office building.
- Improved to Unimproved: Sell a developed retail center and acquire raw land for a future project.
- Industrial to Retail: Move out of a warehouse and into a net-leased retail property.
- Farm to Fund: Trade a working farm for fractional interests in a large, institutional real estate portfolio.
What Doesn’t Count?
While the rule is flexible within real estate, it’s also important to know its boundaries. The like-kind rule, since the 2017 Tax Cuts and Jobs Act, is specifically limited to real property. This means the following assets are explicitly excluded from qualifying for a 1031 exchange:
- Stocks, Bonds, and Notes
- Interests in a partnership (though interests in an LLC taxed as a partnership can qualify)
- Inventory (property held primarily for sale, like a developer’s speculative homes)
- Real property held primarily for personal use
Why This Flexibility is a Game-Changer
When investors realize they’re not stuck in the same asset class forever, the 1031 exchange shifts from being a “tax hassle” to a powerful tool for rebalancing a portfolio.
I’ve seen this flexibility solve all kinds of specific problems over the years:
- Consolidating: Selling a few small rentals to buy one major, institutional-grade property.
- Diversifying: Selling one big “legacy” asset and spreading the equity across several properties in different markets.
- Simplifying Management: Moving from high-touch properties (like apartments) into zero-management assets, such as NNN leases or institutional interests.
The Takeaway
The “Like-Kind” requirement is way less strict than it sounds. It’s essentially the IRS giving you the all-clear to move your equity into whatever type of real estate best aligns with your current financial goals, provided both properties are held for business or investment.
After 20 years of reviewing these deals, my advice is simple: Don’t let the name limit your thinking. As long as it’s real estate held for investment, the options are wide open.
Robert
Sources
- Internal Revenue Service (IRS) Code, Section 1031
- U.S. Treasury Regulations, Section 1.1031
A note on data: Data detailing the precise percentage of 1031 exchanges where the Replacement Property is the same asset class as the Relinquished Property is not publicly released by the IRS or other major industry regulators. Information on the number of exchanges is primarily proprietary, held by Qualified Intermediaries, or available only in high-level, aggregate reports.
DISCLAIMER: Institutional 1031 operates as a Qualified Intermediary (QI) for the purpose of facilitating Section 1031 like-kind exchanges. We are not a law firm, accounting firm, or tax advisory service, and we do not provide legal or tax advice. Any information, examples, or materials provided are for general informational purposes only and should not be relied upon as tax or legal advice. Clients are strongly encouraged to consult with their own independent legal, tax, and financial advisors to evaluate the consequences of any transaction or 1031 exchange.
