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Before 2018, a contractor could trade one piece of construction equipment for another and defer the tax on the gain. A transportation company could do the same with its fleet vehicles. That option closed on January 1, 2018.
Since then, Section 1031 exchanges apply only to real property. Within that box the rule stays generous: any U.S. real property held for investment or business use is like-kind to any other property held the same way. Equipment, vehicles, personal property, and every other non-real-estate asset are out.
What qualifies as real property
Category | Examples | Notes |
|---|---|---|
Land | Raw land, commercial lots, agricultural parcels, mineral rights | Developed or undeveloped; any interest in land qualifies |
Buildings and permanent structures | Houses, apartment buildings, office towers, warehouses, hotels, retail centers | The structure itself, permanently attached to land |
Improvements integral to the land | Paved parking lots, driveways, fences, in-ground pools, underground utilities, permanent landscaping | Must be designed to remain in place indefinitely |
Inherently permanent structures | Cell towers (in some configurations), large-scale solar installations affixed to buildings, built-in building systems (HVAC, plumbing, electrical) | IRS language; the test is whether removal would require significant effort or cost |
The like-kind standard within real property is broad. You can exchange a single-family rental for a commercial office building, a strip mall for farmland, or a warehouse for an apartment complex. The IRS cares about the nature of the asset (real property), not its type, quality, or grade.
What does not qualify
Since the 2017 Tax Cuts and Jobs Act (TCJA), these categories fall outside 1031 treatment:
- Equipment and machinery
- Vehicles (cars, trucks, trailers, heavy equipment)
- Aircraft and watercraft
- Personal property of any kind
- Artwork, collectibles, coins
- Inventory or stock in trade
- Securities, cryptocurrency, digital assets
- Patents, trademarks, intellectual property
- Furniture and appliances (unless within the incidental property safe harbor)
If it is not real property or a permanent part of real property, it does not qualify.
Gray areas that need professional judgment
Solar and wind installations. Panels or turbines permanently affixed to a building or the land are likely real property. Removable or temporary-mount systems may be personal property. The answer turns on construction method and how permanent the attachment is.
Cell towers. A tower leased to a telecom company, where the real asset is the land lease, is generally treated as real property. A tower the telecom company runs as operating equipment may be personal property.
Fixtures. The test is how hard the item would be to remove without damaging the structure. A built-in HVAC system is real property; a portable space heater sitting in the building is not. Installed plumbing, electrical systems, and built-in equipment that would transfer with the building are generally real property.
Treasury Regulation §1.1031(a)-3 (2020) offers guidance, but judgment is still required. Consult a tax professional for borderline cases.
The 15% incidental personal property rule
Under Treasury Regulation 1.1031(k)-1(g)(7), an exchange of real property can include incidental personal property, the items customarily transferred with real property, without losing its status, as long as that property is worth no more than 15% of the replacement property's fair market value. This does not convert personal property into like-kind real property. It just means minor items like built-in appliances or office fixtures will not disqualify an otherwise valid exchange.
The safe harbor does not cover vehicles, equipment, or other substantial personal property that happens to be on the premises.
Allocating mixed properties
When you sell property that includes both real and personal property, the closing statement should identify and value each category separately. That allocation matters for Form 8824 and for calculating boot, the cash or non-like-kind value in a deal that gets taxed. Personal property never qualifies for deferral, so any of it you receive is taxable boot. The 15% figure matters for a different reason: above it, the qualified-intermediary safe harbor that protects the whole exchange from constructive receipt can be lost.
Checking the allocation before you close
When a sale or purchase includes anything that is not real property, the allocation decides how much of the deal is deferred. Before closing:
- Read both contracts for furniture, appliances, equipment and anything else that is not part of the building or land.
- Get the split between real and personal property in writing: in the contract, an appraisal that values personal property separately, or an allocation memo from a CPA.
- Compare the personal property in the replacement purchase with the 15% threshold above, and ask your QI what it changes for your identification and exchange documents.
- Put a number on the taxable part. Personal property you sell is a separate taxable sale, and personal property you receive is boot.
- Confirm that the QI's exchange documents and the settlement statement carry the same allocation.
- Keep the contract language, appraisal and allocation memo with your Form 8824 records.
Why the rule narrowed
Before the TCJA, Section 1031 covered personal property, equipment, vehicles, and even collectibles. The 2017 law cut it back to real property only, partly to raise revenue and partly to limit deferral on non-real-estate business assets.
For investors focused on real property, the practical impact is minimal. The like-kind standard for real property is as broad as it was before 2018: any qualifying real property for any other.
Options for assets that no longer qualify
If you hold appreciated equipment, vehicles, or other personal property that would have qualified before 2018, the choices that remain include selling and paying capital gains tax, continuing to depreciate the asset, donating to a qualified charity for a deduction, or Section 1231 treatment, which taxes gains at capital-gains rates but allows ordinary-loss treatment on losses. Which one fits depends on the asset and your tax position.
Consult a professional about gray-area assets before structuring an exchange.
Frequently asked questions
What changed in the Tax Cuts and Jobs Act about 1031 exchanges?
The 2017 law limited 1031 to real property. Before 2018, personal property, equipment, and other business assets could also qualify; now they cannot.
Do appliances and fixtures in a building count as real property?
Sometimes. If they are permanently attached and customarily transferred with the property, they may be classified as real property. Incidental personal property may be disregarded for certain safe-harbor purposes under Treas. Reg. 1.1031(k)-1(g)(7), but that does not convert personal property into like-kind real property. Removable items likely remain personal property.
Are solar panels or cell towers real property or equipment?
This is a gray area. Solar panels that are permanently mounted and integral to the property may count as real property. Cell towers are more complex and depend on whether they are treated as part of the land or as separate equipment.
What's the "incidental personal property" safe harbor?
Under Treas. Reg. 1.1031(k)-1(g)(7), incidental personal property (such as appliances, furniture, or equipment customarily transferred with real property) may be disregarded for safe-harbor purposes if it represents less than 15% of the aggregate fair market value. It does not become like-kind real property; it is simply disregarded for certain exchange mechanics. Consult a tax professional for your specific situation.
Can I exchange my equipment or vehicle in a 1031?
No. After the TCJA, only real property qualifies. Equipment, vehicles, aircraft, and machinery are no longer eligible for 1031 treatment.