Like-Kind Property Explained

Like-kind is one of the more misunderstood terms in the exchange process, because it sounds like it should mean the replacement property has to resemble the relinquished one in type or use. It does not. Under current law, like-kind for a 1031 exchange means any real property held for investment or use in a trade or business can be exchanged for any other real property held for investment or use in a trade or business, regardless of asset class, location, or condition. A vacant lot outside Basalt can be exchanged for a retail strip center in another state; a condo-hotel interest in Aspen can be exchanged for an apartment building a thousand miles away.

The property has to be real property under the applicable state and local law where it is located, held either for investment purposes or for use in a trade or business, not for personal use and not held primarily for sale as inventory. This covers a wide range of asset types: raw land, single-tenant retail, multifamily buildings, industrial and warehouse space, medical office buildings, self-storage facilities, and fractional or co-ownership interests in real property that meet the applicable ownership structure requirements. The breadth of what qualifies is exactly why Aspen-area investors selling a single high-value local asset have real flexibility in choosing a replacement, from a single larger property to several smaller ones in a different market.

Since 2018, personal property no longer qualifies for 1031 treatment at all, only real property. A few specific categories commonly trip up exchangers evaluating what fits.

• Primary residences and property held purely for personal use, since the property has to be held for investment or business purposes
• Property held primarily for sale, such as a spec home built and sold by a developer, which is treated as inventory rather than investment property
• Personal property of any kind, including business equipment, vehicles, and most tangible personal property, which lost 1031 eligibility under the 2017 tax law changes
• Property located outside the United States when exchanged for property located inside the United States, since real property has to be domestic on both sides of the exchange
• Partnership interests, stocks, bonds, and other securities, which have never qualified as like-kind real property

Because the like-kind standard is broad on asset type, the harder question in practice is often intent and use rather than what kind of property is involved. A second home used occasionally for personal stays and rented out the rest of the year sits in a gray area that depends on the specific pattern of personal versus rental use, and generally needs to meet safe harbor guidance on rental days and limited personal use to qualify cleanly. A property purchased with the intent to flip quickly, even if it is technically real estate, can be challenged as inventory rather than investment property. Documenting rental history, holding period, and business purpose in advance protects the exchange if the qualifying use of either property is ever questioned.

Aspen and the surrounding valley towns have property types that raise like-kind questions more often than a typical suburban market: condo-hotel interests, fractional ownership structures, and short-term rental units that blur the line between personal and investment use. A condo-hotel unit rented through a management program and never used personally is generally on solid ground as investment property. The same unit used by the owner for several weeks a year needs a closer look at how much personal use is allowed before it jeopardizes the investment-property classification the exchange depends on.