Since the 2017 Tax Cuts and Jobs Act, only real property qualifies for a 1031 exchange. The 2020 final regulations draw the line: real property covers land, buildings, and structural components, while equipment, vehicles, and furniture do not. The incidental personal property rule lets tangible personal property ride along as real property when it stays within 15% of the total value, so careful allocation is what keeps unintended boot off the client's return.
After TCJA, only real property qualifies
Before 2018, a 1031 exchange could cover a broad range of assets: real property, equipment, vehicles, even intangibles. A company could trade equipment for equipment, or one intangible asset for another, all under the same deferral rules.
The Tax Cuts and Jobs Act of 2017 narrowed that sharply. Starting in 2018, only real property qualifies for a 1031 exchange. Personal property no longer does.
For advisors, the change shows up in two places. A client who owns equipment, vehicles, machinery, or artwork can no longer exchange those assets at all. And when real property is sold bundled with personal property - a furnished rental, a restaurant with its kitchen, a building with removable systems - the split between the two decides how much of the sale counts as boot, meaning proceeds that fall outside the exchange and can be taxed, and with it the client's bill.
What the 2020 regulations count as real property
In December 2020 the IRS finalized regulations (T.D. 9935) spelling out what "real property" means for exchanges after 2017.
Real property includes:
- Land, improved or unimproved.
- Buildings and other inherently permanent structures, including parking lots, bridges, fences, and roads.
- Structural components permanently affixed to buildings: HVAC, plumbing, electrical, roofing, walls, floors.
- Land improvements such as landscaping, drainage systems, and permanently affixed infrastructure.
- Intangibles tied to the land, like licenses, permits, covenants, and easements that run with it.
Real property does not include:
- Equipment and machinery that isn't permanently affixed.
- Vehicles, aircraft, and vessels.
- Furniture and fixtures that come out without damage.
- Artwork, collectibles, and other tangible personal property.
- Business goodwill, customer lists, and intellectual property.
- Stock and partnership interests.
Fixtures: the gray zone
A fixture is something built, bolted, or wired into a property firmly enough that removing it would do real damage. Fixtures count as real property.
On the real-property side: permanent HVAC, plumbing, and electrical systems; built-in cabinetry and shelving; structural flooring, walls, and components; permanently affixed signage; and solar panels, which generally qualify once installed.
On the personal-property side, even when they're used in the business: removable appliances such as ovens, refrigerators, and washers; removable furniture; movable equipment, from restaurant gear to office machines; vehicles, tools, and machinery; and artwork and decorations.
The line can be fine. An oven built into the counter is more likely a fixture than a freestanding one; shelving bolted to the wall, more than shelving that stands on its own. The question is always the same: could you take it out without damaging the property?
The 15% rule for incidental personal property
The 2020 regulations added a practical carve-out. Personal property that moves with the real property is treated as real property, and so qualifies for the exchange, when two things are true: it's incidental to the deal rather than the point of it, and it comes to no more than 15% of the combined fair market value of everything transferred.
That spares a lot of furnished and equipped properties from a separate allocation.
Take a furnished short-term rental that sells for $500K, with the real property valued at $450K and the furnishings and equipment at $50K. The personal property is 10% of the price. Because it's incidental and under 15%, the whole $500K qualifies as real property, and the client can exchange the full proceeds with no separate allocation.
Move the furnishings up to $100K on that same $500K sale and it changes. Now personal property is 20%, over the line. Only the portion within the 15% threshold qualifies; the excess of $25K has to be allocated separately. That $25K becomes boot. To defer in full, the client reinvests $475K, and the $25K itself is taxable to the extent of the gain.
Where the line blurs
Solar panels
Solar panels are generally real property when they're permanently affixed to a building and meant to power it; the IRS has issued guidance treating solar that way. Portable or removable panels, or panels owned by the buyer rather than the property, can land on the other side of the line. When a property carries a significant solar investment, advisors typically confirm the treatment with the appraiser and coordinate with tax counsel. For an office building with permanently affixed solar, the building, structure, HVAC, electrical, and the panels are all real property; office furniture usually stays out of the real estate sale, and the exchange covers the whole property.
Cell towers
The tower itself, the physical steel or masonry structure, is real property. The gear mounted on it, antennas, transceivers, and cables, is usually personal property, and often owned or leased by the telecom company rather than sold with the land. Sell just the tower and land, and the real property qualifies. Bundle the equipment into the deal and it has to be split out, because the equipment doesn't qualify.
Tenant improvements and built-in systems
In commercial space, built-out improvements that are structural and permanent, HVAC, electrical, plumbing, and built office space, are real property. Improvements that come out cleanly, like removable partitions, flooring, or lighting, may be personal property. It turns on the facts, which is why advisors often bring in both the appraiser and the building's engineer to classify the work.
Furnished short-term rentals
Vacation rentals and furnished apartments tend to come with furnishings, artwork, linens, and kitchen equipment, all personal property. The move is to get an allocation, from the seller's CPA or negotiated into the purchase agreement, and check whether those items clear 15% of the price. Under the threshold, the incidental rule lets the whole amount qualify. Over it, only 15% can be treated as real property and the rest is boot.
At the margin the threshold is a hard line. A furnished rental sells for $800K gross, with $680K in real property and $120K in furnishings, linens, equipment, and artwork - exactly 15%, so the full $800K still qualifies. Push the furnishings to $140K and only $120K qualifies; the other $20K is boot.
Equipment in service businesses
A restaurant, salon, or auto shop can carry serious equipment: kitchen lines, lifts, chairs. That equipment is personal property, full stop. Value the building separately from the gear, spell out the split in the purchase agreement, and know the equipment portion won't qualify. If a client wants to exchange, only the real property proceeds can be reinvested under 1031; the equipment proceeds come out as cash or go into something else. For a restaurant that sells for $500K with $200K of that in kitchen equipment, restaurant furniture, removable fixtures, and goodwill, the $200K is boot.
Getting the allocation right
In a mixed-property deal, the allocation is the work, and the biggest mistake is starting it late. Once the purchase agreement is signed, the split may already be written into the contract; agreeing on it during negotiation means buyer and seller work from the same numbers.
Two habits prevent most of the trouble. Don't assume everything attached to a building is real property - equipment and removable items frequently aren't, so ask of each one whether it's permanently affixed and whether removing it would damage the property. And don't sit on bad news: if a deal carries significant personal property and the client expects a clean exchange, the fact that some proceeds can't be exchanged should surface during due diligence, not at closing.
When personal property crosses 15%, the consequence lands on the client. To defer in full, they reinvest less than the whole proceeds; otherwise they take the excess as boot and recognize gain on it.
A pre-exchange checklist
For any exchange involving property with non-structural components:
The rule itself is short: real property only. The judgment lives in the split.
When a sale mixes real and personal property, the allocation is the work: value it properly, read the purchase agreement, coordinate with appraisers, and flag any deal with meaningful non-real-property components early. A sloppy allocation can quietly raise the client's boot recognition and tax bill.
Frequently asked questions
Do equipment and furniture exchanges qualify for 1031 after TCJA?
No. Since 2017, 1031 exchanges are limited to real property: land, buildings, and structural components. Equipment, vehicles, machinery, and furniture don't qualify. When a client sells real property with personal property attached, like a furnished rental or a restaurant with its equipment, the personal property portion is allocated separately and stays outside 1031, which affects how much boot the client recognizes.
What about fixtures permanently attached to the building?
Fixtures, meaning items attached firmly enough that removing them would damage the property, are treated as real property, so they qualify. Built-in HVAC, plumbing, and electrical systems, permanently affixed shelving, and structural flooring are typical examples. The test is whether taking the item out would harm the property. Something removable and personal in nature does not qualify, even if it was used in the real estate business.
What about partnership interests and LLC interests?
Partnership and LLC membership interests are not real property, so they don't qualify for 1031 exchanges. A client who holds real estate through an entity owns an interest in that entity, not the underlying property; to use 1031, the entity itself must run the exchange, not the individual partner or member. See the article on partnerships and same-taxpayer rules for more detail.
How does the incidental personal property rule work?
Under the 2020 final regulations, tangible personal property is treated as real property for 1031 purposes when it's incidental to the real property and comes to no more than 15% of the aggregate fair market value of everything transferred. That lets a seller fold in appliances, furnishings, or equipment without a separate allocation. Once personal property tops 15%, the excess is allocated separately and does not qualify for 1031 treatment.
What should advisors do when a sale includes significant personal property?
Read the purchase agreement for every personal property component: equipment, furnishings, vehicles, goodwill. Request an allocation of the purchase price between real and personal property from the seller's CPA or the buyer. Coordinate with the appraiser so the real property valuation excludes personal property, then work out whether personal property exceeds 15% of the total. If it does, the excess is unintended boot for the client. Flag it early so the client understands the tax impact and can adjust the exchange structure if needed.