Like-Kind Property Explained

Since the 2017 tax law changes, 1031 treatment applies only to real property, but within that category the like-kind standard is generous. An investor selling raw land in eastern Washington can acquire a leased retail building in Tacoma. An apartment building in Spokane can be exchanged for a medical office building in Bellevue. A warehouse in Kent can be exchanged for an interest in a Delaware statutory trust holding a portfolio of properties elsewhere in the country. What matters is that both properties are real property held for investment or use in a trade or business, not that they share a category, location, or physical characteristics.

The like-kind standard only applies to property held for productive use in a trade or business or held for investment.

• A rental property, whether residential rental, commercial, or industrial, generally qualifies as investment property
• Vacant land held for appreciation or future development can qualify, even without current income
• A property purchased primarily to resell quickly, sometimes called dealer property, typically does not qualify, since it is treated as inventory rather than an investment asset
• A primary residence does not qualify, since it is not held for investment or business use

Investors who have flipped several properties in a short period, or who bought a property with resale as the clear primary purpose, should get advice on whether that specific property will be treated as investment property or dealer property before relying on exchange treatment.

Personal property exchanges lost 1031 eligibility entirely under current law, so equipment, vehicles, artwork, and similar assets no longer qualify regardless of how they are used. A primary residence does not qualify, though a Section 121 exclusion may apply separately to that kind of sale. Property located outside the United States is not like-kind to property located within the United States, even though both may otherwise be qualifying real estate. Partnership interests also do not qualify as like-kind property, which matters for investors who co-own property through an entity and are considering how ownership is structured heading into an exchange.

Properties with a mixed personal and business use, such as a building with an owner's residence above a ground-floor business, require the exchange to be limited to the business or investment portion of the property. A Washington investor selling a building where part of the space was used as a personal residence would typically need to allocate the sale between the qualifying business portion and the non-qualifying residential portion, applying exchange treatment only to the former. Getting this allocation wrong, either by exchanging the whole property or by mischaracterizing which portion was personal use, is a common source of later tax exposure.

Because like-kind treatment is so broad for real property, Washington investors have real flexibility to change strategy through an exchange rather than simply replacing what they already own. An investor tired of managing a Seattle multifamily property can move into a triple-net retail asset with a corporate tenant and no landlord responsibilities. An investor holding raw land near Yakima can exchange into an income-producing industrial building in the Kent Valley. The exchange rules do not require the replacement to match the relinquished property's use, size, or income profile, only that both sides are qualifying real property held for investment or business purposes, which is what makes the like-kind standard useful for investors actively repositioning a portfolio rather than simply deferring tax on a like-for-like swap.