"Like-Kind" in 2026: What Counts as Real Property After TCJA

The Pre-2018 World: More Flexible

Before 2018, 1031 exchanges were broader. The like-kind standard was generous, especially for business property. You could exchange:

• Equipment for different equipment
• Vehicles for other vehicles
• Aircraft for aircraft
• Even personal property like artwork, coins, and collectibles

The IRS's position was that "like-kind" meant property of the same general type or class. A commercial kitchen for a restaurant could be exchanged for a commercial kitchen for a hotel. Equipment for a manufacturing plant could be exchanged for equipment for a different manufacturing process.

This flexibility made 1031 a powerful tool for businesses constantly upgrading equipment, vehicles, and machinery. A contractor could exchange used construction equipment for newer equipment and defer taxes. A transportation company could exchange vehicles as their fleet evolved.

Then came the Tax Cuts and Jobs Act.

The TCJA Change: Real Property Only

In 2017, Congress amended Section 1031(a) with this language:

"Exchanges of property [in general shall not] fail to qualify under this section merely because the property is exchanged purely for property of like-kind...shall include only real property."

The addition of "only real property" was the game changer. As of January 1, 2018, 1031 exchanges apply exclusively to real property. All other property types were eliminated.

This was a significant contraction of 1031's scope. Overnight, a powerful business tax tool became narrowly focused on real estate.

The reasoning was partly revenue-driven. Congress wanted to broaden the tax base and raise revenue. Limiting 1031 did both. But there was also a policy argument: the step-up in basis (which we discussed in the inheritance article) was being preserved for personal property; Congress wanted to at least limit deferral opportunities for business property.

What Counts as Real Property

Real property, in the 1031 context after TCJA, includes:

Land. The raw earth, whether developed or undeveloped. Commercial land, residential land, agricultural land, mineral rights (potentially). Any interest in land qualifies.

Buildings and permanent structures. Houses, commercial buildings, office towers, warehouses, hotels, retail centers, apartment buildings. The structure itself, attached to the land.

Improvements integral to the land. Paved parking lots, driveways, fences, in-ground pools, underground utilities directly serving the property, landscaping improvements.

Inherently permanent structures. This is IRS language. It means structures designed to last indefinitely and intended to be permanent. The IRS distinguished these from temporary structures.

The key is permanence. If the structure is designed to be part of the real property and would be removed only with significant effort or cost, it's likely real property.

What Doesn't Count

Post-TCJA, these do NOT qualify for 1031 treatment:

• Equipment and machinery
• Vehicles of any kind (cars, trucks, trailers, heavy equipment)
• Aircraft and helicopters
• Boats and watercraft
• Personal property of any kind
• Artwork, collectibles, coins
• Inventory or stock
• Securities and stocks
• Cryptocurrency and digital assets
• Patents, trademarks, intellectual property
• Furniture and appliances (unless part of the incidental property safe harbor)

The exclusion is broad. If it's not real property or a permanent part of real property, it doesn't qualify.

The Gray Areas

Real property is usually clear. But some situations sit in gray zones that require careful analysis.

Solar installations. Modern solar panels can be mounted on roofs or ground. The question: are they part of the real property (and thus qualify) or are they personal property/equipment (and thus don't qualify)?

The IRS has been clarifying this. If solar panels are permanently affixed to a building, they're likely part of the real property. If they're removable or mounted on a temporary structure, they may be personal property. The answer depends on facts and circumstances.

Wind turbines. Similar analysis. A large-scale wind turbine mounted on land might be real property if it's integral to the land's use. A smaller removable turbine might be personal property. Again, it depends on construction and intent.

Cell towers. A cell tower mounted on your property creates a gray area. Is the tower a permanent structure (real property) or equipment (personal property)? The IRS's position is nuanced. If the tower is fundamentally part of your business (you're a telecom company using it for operations), it might be personal property. If it's leased to another company and the lease of your land is the primary asset, the real property qualification is clearer.

Parking lots and paving. A paved parking lot, once constructed, is generally considered part of the real property. It's not a removable asset; it's a permanent improvement to the land. So yes, parking lot upgrades, repaving, and parking lot real estate typically qualify as real property for 1031 purposes.

Fixtures. This is where personal property and real property blur. A fixture is personal property that has become affixed to real property. The toilet in your building is originally a piece of personal property. Once installed and plumbed in, it's arguably a fixture (part of the real property). The test is usually: how difficult would it be to remove without damage? If it's bolted down and plumbed, it's likely a fixture (real property). If it's a portable item sitting in the building, it's personal property.

Equipment in a building. An apartment building might have an HVAC system, electrical equipment, plumbing systems. These are customarily part of the building and would transfer with it. They're likely real property or part of the real property.

The 2020 Treasury Regulation 1.1031(a)-1(c) provides guidance, but it still requires judgment. When in doubt, consult a professional.

The 15% Incidental Personal Property Rule

Treasury Regulation 1.1031(k)-1(g)(7) provides that incidental personal property is disregarded for certain safe-harbor purposes (such as the actual/constructive receipt rules). This does not convert personal property into like-kind real property. The regulation addresses incidental personal property.

If you're exchanging real property, the exchange can include up to 15% of the fair market value of the like-kind property in "incidental" personal property (items customarily transferred with real property), and the exchange still qualifies.

This is helpful for situations where the property transfer includes minor personal property items. For instance, you're exchanging an apartment building. The replacement building includes some built-in furniture, office equipment, and appliances. As long as these items represent less than 15% of the value of the building, the entire exchange can qualify.

The safe harbor doesn't mean you can throw anything into the exchange and have it qualify. The personal property must be incidental: items customarily transferred with real property. You can't argue that a fleet of vehicles or expensive machinery is "incidental" because they happen to be on the property.

Identifying and Allocating Mixed Properties

When you're selling a property that includes both real and personal property, proper allocation matters.

Your closing statement should separately identify real property and personal property values. If you're selling an apartment building with appliances and furnishings, the statement might say something like: "Building and land: $1.2 million. Appliances and furnishings: $50,000."

This clarity is important for Form 8824 and tax reporting. If the IRS questions the exchange, you want documentation showing how you allocated the purchase price between real and personal property.

If personal property represents more than 15% of the replacement property's value, the excess personal property doesn't qualify for 1031 deferral. The boot rules and gain recognition come into play.

Planning Around the Real Property Limitation

If you have equipment, machinery, or vehicles that have appreciated, and you wanted to exchange them under old 1031 rules, you can't anymore.

Your options:

1. Sell and pay taxes. Sell the property, pay capital gains tax, and reinvest.

2. Hold for depreciation. Continue depreciating the property (if eligible) and eventually scrap or sell it, taking a loss or minimal gain.

3. Donate to charity. If you have significant appreciated property, donating to a qualified charitable organization can eliminate the capital gains tax and generate a deduction.

4. Section 1231 treatment. Some business property might qualify for Section 1231 treatment, which allows capital gains treatment on gains but ordinary loss treatment on losses. It's not as favorable as 1031 deferral, but it's better than regular income tax rates.

5. Keep it real estate focused. If you're upgrading a business, focus capital investments on real estate components that qualify for 1031.

The Bottom Line

The TCJA fundamentally changed 1031 exchanges by restricting them to real property only. This was a big shift from the pre-2018 world where personal property, equipment, and collectibles could be exchanged.

Understanding what qualifies is essential. Land, buildings, and permanent improvements typically qualify. Equipment, vehicles, and personal property typically don't. Gray areas like solar panels, cell towers, and some fixtures require careful analysis.

When you're planning a 1031 exchange, ensure you're exchanging real property. If your transaction includes mixed assets, properly allocate the values and understand the tax consequences. Consult a professional about gray areas. The difference between qualifying real property and non-qualifying personal property could be thousands in unexpected taxes.