A 1031 exchange (named for Section 1031 of the Internal Revenue Code) lets real estate investors defer recognition of gain on the sale of investment or business-use real property by reinvesting proceeds into "like-kind" replacement property. The structure has been part of the tax code in some form for nearly a century, and the rules around what qualifies as like-kind have evolved enough that even experienced investors revisit the basics with their advisors before each transaction.
This is an educational walkthrough of the topics worth raising with a qualified tax advisor before you start a 1031 exchange. It is not advice. The specific rules that apply to a particular transaction depend on facts your advisor will need to review with you directly, and the like-kind concept has nuances that have shifted over time and across jurisdictions.
What "like-kind" means in the 2017+ tax landscape
The Tax Cuts and Jobs Act of 2017 narrowed Section 1031 significantly. Before 2018, like-kind exchanges were available for both real property and a wide range of personal property (equipment, vehicles, artwork, collectibles). Since 2018, Section 1031 applies only to real property held for productive use in a trade or business or for investment.
This change is the single most important topic to raise with your tax advisor if your prior 1031 experience predates 2018. The rules you remember may no longer apply. Topics to clarify in the first conversation:
- What categories of real property currently qualify under Section 1031.
- Whether the property you currently hold meets the "held for productive use in a trade or business or for investment" standard.
- Whether any non-real-property components of a sale (equipment, fixtures, FF&E in a hotel sale) need to be separately accounted for.
- How the 2017 narrowing interacts with any state-level conformity rules in your state.
The IRS Form 8824 instructions are the authoritative starting point for understanding the federal reporting framework. State conformity varies and is worth a separate conversation with a state-tax-aware advisor.
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Topics about the "like-kind" standard itself
The phrase "like-kind" in real estate is broader than most people assume on first hearing it. The IRS and Treasury regulations have historically treated almost all real property as like-kind to other real property, regardless of grade, quality, or specific use:
- Raw land can be exchanged for a commercial building.
- A single-family rental can be exchanged for an apartment complex.
- A retail strip can be exchanged for an industrial warehouse.
- Air rights, easements, and leasehold interests of 30+ years can qualify.
Topics to review with your advisor before assuming a specific exchange will qualify:
- Whether the specific property type involved (DST interest, tenancy-in-common, leasehold) is treated as real property for Section 1031 purposes.
- Whether any portion of the property is subject to depreciation recapture that affects the exchange's tax benefit.
- How the property's classification on prior tax returns affects what the IRS expects to see now.
- Whether the property is foreign or domestic , domestic real property is not like-kind to foreign real property under current rules.
The IRS has issued guidance over the years on edge cases (mineral rights, water rights, conservation easements, etc.). A tax advisor who works regularly with 1031 transactions will know which recent rulings affect the specific facts of your transaction. Educational reference material from the American Institute of CPAs and from the Treasury Department's Office of Tax Policy is worth bookmarking, though both are general-audience resources, not transaction-specific guidance.
Topics about the "held for use" requirement
Both the relinquished property and the replacement property must be "held for productive use in a trade or business or for investment." This requirement is one of the most heavily examined by the IRS when exchanges are challenged. Topics to clarify:
- How long the relinquished property was held for the qualifying purpose, and whether any change in use within the last few years would affect qualification.
- How you plan to demonstrate that the replacement property is acquired with intent to hold for a qualifying purpose, not for resale or personal use.
- Whether any plans to convert the replacement property to personal use within a certain period would create issues.
- How the holding-purpose analysis is documented in your records (intent at acquisition, actions consistent with that intent over time).
Personal residences do not qualify for 1031 treatment under federal law. Property used partly for personal purposes and partly for business or investment (mixed-use) presents complications worth discussing in detail. Topics include:
- Whether the personal-use portion exceeds the limits that would disqualify the property.
- How to handle a vacation home that has been rented out for some portion of the year.
- How the "safe harbor" rules in IRS Revenue Procedure 2008-16 apply to vacation rental properties.
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Topics about timing and the like-kind window
The 45-day identification period and 180-day exchange period are well-known. The like-kind requirement interacts with timing in ways worth discussing:
- How a property identified within the 45-day window can be substituted if it does not close, and what the substitution rules require.
- Whether a property whose like-kind classification is uncertain should be identified at all, or whether the 200% rule or 95% rule offers a safer alternative identification structure.
- How the like-kind requirement applies during the 180-day window if a property changes character (a multifamily property is rezoned, a commercial building's leases change significantly).
- How to handle a deferred exchange where the replacement property is under construction (improvement exchanges) and the like-kind nature of the partially-improved property matters at the exchange closing.
A qualified intermediary (QI) holds the proceeds and facilitates the exchange. The QI is not a tax advisor and cannot make tax determinations. Coordinating with both your QI and your tax advisor before identification is one of the most useful structural choices you can make.
Topics about Delaware Statutory Trusts and like-kind status
Delaware Statutory Trusts (DSTs) are a specific structure that the IRS has historically treated as direct real property ownership for 1031 purposes (under Revenue Ruling 2004-86, an investor's beneficial interest in a DST that meets certain requirements is treated as a direct interest in the underlying real estate). Topics to clarify with your advisor if a DST is under consideration:
- Whether the specific DST in question is structured to meet the Revenue Ruling 2004-86 requirements.
- How the DST sponsor's documentation supports the like-kind treatment.
- What ongoing requirements the DST must satisfy to maintain its like-kind status over time.
- How exits from a DST work and what the like-kind treatment looks like in a future exchange or in a 721 UPREIT conversion if available.
DST structures are complex enough that an attorney with 1031-DST experience often reviews them alongside the tax advisor. The investor's role is to ensure both professionals have read the same documents.
For broader context on what to clarify with an advisor before any 1031 transaction, the questions to ask an advisor guide on Capivise walks through the conversation framework, and the 1031 and DST advisor matching page covers what to look for in an advisor who specializes in this work.
Topics about state-level conformity
Federal Section 1031 treatment doesn't guarantee identical treatment at the state level. A few states conform fully; some conform with modifications; some have decoupled significantly. Topics worth raising with a state-tax-aware advisor:
- Whether your state of residence conforms to federal Section 1031 in the year of the exchange.
- Whether the state where the relinquished property is located treats the exchange the same way.
- Whether the state where the replacement property is located has different reporting or holding requirements.
- Whether any "claw-back" provisions apply if you later sell the replacement property and move out of state, or if you exchange out of state.
California, in particular, has specific claw-back rules that affect taxpayers who 1031 out of California real estate into property in other states. Several other states have unique rules worth understanding before structuring an exchange that crosses state lines.
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Topics about depreciation recapture and basis
A 1031 exchange defers gain but does not eliminate it. The basis of the replacement property is generally the basis of the relinquished property, adjusted for any boot received or additional cash contributed. Topics to clarify:
- How depreciation recapture interacts with deferred gain in the exchange.
- What the carryover basis means for future depreciation deductions on the replacement property.
- How a future sale of the replacement property (without further exchange) would surface the deferred gain.
- How basis carries through if the exchange involves multiple properties on either side.
The Section 1250 rules for depreciation recapture on real property and the broader basis-tracking conversation deserve their own discussion with a tax advisor before the exchange closes. Records from the relinquished property need to be maintained for the life of the replacement property; that's a long horizon and worth documenting carefully.
Topics about the role of professionals in your transaction
A 1031 exchange typically involves several professionals working in coordination:
- A tax advisor (CPA, enrolled agent, or tax attorney) who handles the Section 1031 analysis and reporting.
- A qualified intermediary who holds proceeds and processes the exchange.
- A real estate attorney who handles property-specific contract work.
- A title company that handles the closing.
- A real estate broker for each side of the transaction.
Topics worth clarifying about how these professionals interact:
- Who is responsible for confirming that the QI is properly structured (a QI failure can invalidate the exchange).
- How communication between the tax advisor and the QI is structured during the 45-day and 180-day windows.
- How conflicts between attorneys (yours vs. the QI's vs. the property attorneys) are handled if they arise.
- How fees are structured and who pays each professional, to avoid mid-transaction disputes.
The SEC Investor.gov resource has general information about working with financial professionals, and the FINRA BrokerCheck tool can verify securities-licensed professionals if any of the parties hold those licenses. Neither is specific to 1031 transactions, but both are part of the broader due-diligence vocabulary.
A short pre-exchange conversation checklist
When sitting down with a tax advisor before initiating a 1031 exchange, useful topics to raise in roughly this order:
- Confirm that the relinquished property qualifies under the current real-property-only Section 1031 rules.
- Confirm that the property has been held for a qualifying purpose, with adequate documentation.
- Discuss the categories of replacement property that would meet the like-kind standard.
- Clarify state-level conformity for all states involved.
- Discuss timing constraints and how to use the identification rules safely.
- Coordinate the qualified intermediary selection and onboarding.
- Plan the closing sequence and depreciation/basis tracking that will follow.
None of the above is a substitute for advice on your specific facts. A tax advisor who has handled 1031 transactions across multiple states, multiple property types, and the post-2017 framework will catch things a checklist cannot.
If you're at the point of needing to find an advisor with the right specialization, the educational matching resource at Capivise covers what to look for and what questions to ask before engaging. The advisor matching page walks through the framework, and the security and privacy detail covers how the matching process handles sensitive information.
The like-kind requirement is the technical heart of a 1031 exchange. Get the conversation about it right with your tax advisor, before identification, before closing, and certainly before signing anything. The work to do that conversation properly is small compared to the cost of an exchange that fails to qualify for treatment you assumed it would receive.
