1031 Exchange Replacement Property

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There is a misconception to what satisfies the Internal Revenue Code (IRC) requirement for 1031 exchange replacement property. Many believe, and correctly so, that the 1031 exchange replacement property must be “like-kind.” The 1031 code clearly states that property is to be exchanged for like-kind or like class property. The application is different for real and personal property.

Proper Intent

1031 exchange replacement property must be “held in a trade, business or investment,” which is considered the proper intent. Though the intent can change based on health, family, work or unforeseen circumstances, it is important that the facts support proper intent at the time the property is acquired, held or replaced. Holding the property in a trade, business or investment implies a season of time to allow the property to be used, not as inventory or profit, but for appreciation or gain.

Consequently, when a single family home is acquired with intent to renovate and resell, better known as fix and flip, though the property is held in a trade or business, it is not held for investment that qualifies for a 1031 exchange. If after the fix the property was rented at the fair market rate, then the property is eligible for a 1031 exchange.

Real Property

The 1031 code considers real property or real estate as like-kind to other real estate, independent of whether the property is improved or unimproved. For example, land, oil and gas royalties, commercial property, and vacation rentals are all considered as eligible 1031 exchange replacement property for one another. Consideration is given to the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, the duration of the interests, and any other factor bearing on the nature or character of the properties as distinguished from their grade or quality. 

Personal Property

The like-kind, like class 1031 exchange replacement property requirement for personal property is less liberal. Grade or quality are not considered in the like-kind application of real or personal property. Yet personal property is classified into either one of thirteen general asset classes or the North American Industry Classification System that both the old and the new personal property must share.

For example, fishing permits are considered like-kind with other fishing permits, regardless of species or location of fishery. Livestock held for sport, drafting, breeding and dairy are considered like kind to livestock of the same sex, as in a bull for bull, stallion for stallion but not bull for heifer or stallion for mare. An aircraft can be exchanged for another aircraft or a railroad car for another railroad car.

The location of 1031 exchange replacement property is important. Property located in the United States is not like-kind to property located internationally. Personal property used predominantly overseas is not like-kind to personal property used predominantly in the United States. 

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