Like-Kind Property Explained

An investor can sell a Nashville apartment building and acquire raw farmland in West Tennessee, or sell a Memphis warehouse and buy a retail strip center in Knoxville, and the exchange still satisfies the like-kind requirement. The comparison is between the nature of the property, real property versus real property, not between asset classes, property condition, or geographic location. A single-tenant net lease building and a multi-tenant industrial park are like-kind to each other in this framework, even though they function very differently as investments.

This flexibility is one of the main reasons 1031 exchanges get used to reposition a portfolio entirely, moving from active management into a more passive holding, or from one asset class into a completely different one, without breaking the exchange.

What disqualifies a property is not its type but its use. Both the relinquished and replacement properties must be held for productive use in a trade or business, or held for investment. A primary residence does not qualify, nor does a second home used mainly for personal enjoyment, even though both are real property in the ordinary sense. Property held primarily for resale, such as a fix-and-flip project or inventory held by a builder, also fails to qualify because it is not held for investment purposes.

This is why the qualifying question for any property is less about what it is and more about how it has been used and how the investor intends to use the replacement.

Since 2018, like-kind exchange treatment under Section 1031 applies only to real property. Personal property exchanges, once available for equipment, vehicles, aircraft, and similar assets, no longer qualify at all. Investors selling a property with fixtures or equipment bundled into the sale need to separate the real property component from any personal property value, since the personal property portion cannot defer under the exchange regardless of what it is exchanged for.

Foreign real property is also excluded. Real estate located outside the United States is not like-kind to real estate located inside the United States, so an exchanger cannot combine a domestic relinquished property with a foreign replacement, or the reverse, under Section 1031.

A landlord selling a small multifamily property in Chattanooga to buy a triple net lease building near Nashville is exchanging like-kind property, even though the tenant relationship, lease structure, and management burden are completely different. Similarly, an owner selling timberland in rural Tennessee to acquire an industrial building in the Memphis area stays inside the like-kind definition, since both are real property held for investment.

Where Tennessee investors most often need to double-check the definition is mixed-use property, such as a building that includes both an owner's personal residence and rented commercial space, or agricultural land that includes a personal homestead. In those cases, only the portion held for investment or business use is eligible, and the personal-use portion has to be excluded from the exchange.

Vacation rentals raise a similar question, since a property used partly for personal stays and partly rented out sits closer to the personal-use line than a straightforward rental. Investors in the Gatlinburg and Sevierville short-term rental market generally track rental days against personal-use days carefully, since the ratio can determine whether the property qualifies as held for investment at all when it eventually gets sold and exchanged.