Is the furniture in a furnished rental boot in a 1031 exchange?

The beds and sofas failed the like-kind test in 2018, and the 2020 regulation drew the line

Reg. §1.1031(a)-3, which applies to exchanges beginning after December 2, 2020, defines real property as land, inherently permanent structures and their structural components. Structural components include the wiring, plumbing, HVAC, elevators, floors, insulation, fire suppression and security systems — the things bolted into the building stay with the building.

Everything a moving crew could carry out fails. In a furnished rental that means mattresses, case goods, seating, dining sets, televisions, linens, kitchenware and freestanding appliances; in a hotel it means the entire FF&E schedule; in a car wash or self-storage property it means the tunnel equipment, gates and kiosks.

One line is genuinely close: a built-in dishwasher or a hardwired range hood is normally a structural component, while the same appliance sitting in a cutout and plugged into an outlet is not. Ask your CPA to walk the contents list before the contract is signed.

What the 15% incidental rule actually does, and what it does not do

The test itself is narrow. Property is incidental only when 'in standard commercial transactions, the property is typically transferred together with the larger item of property' and 'the aggregate fair market value of all of the incidental property does not exceed 15 percent of the aggregate fair market value of the larger item'.

Pass it and two problems vanish. You do not have to list the contents on your day-45 identification notice, and your intermediary can pay for them at the replacement closing without the payment being treated as money released to you outside the safe harbor.

The tax does not vanish. Paragraph (g)(7)(iii) describes the relief as applying to 'personal property generally resulting in gain recognition under section 1031(b)', and the Form 8824 instructions repeat that such property 'is disregarded' only for that 15% purpose. On a $1,200,000 replacement the ceiling is $180,000 of contents — and every dollar of it is still boot.

On your sale, the price you put on the contents is a separate transaction reported outside the exchange

The consideration allocated to furnishings is not exchange proceeds. Form 8824 handles it on lines 12 through 14, where you enter the fair market value and adjusted basis of the other property given up and report that gain on your return; the exchange itself covers only the real property.

That gain is usually ordinary. Under §1245(a)(1) the excess of the lower of recomputed basis or amount realized over adjusted basis 'shall be treated as ordinary income', and furniture and appliances in a residential rental are 5-year property that is often fully written off years before the sale.

So the allocation is a negotiation with real money in it. A buyer wants a large contents number for a fast write-off; every dollar of that number is ordinary income to you rather than deferred gain. Pick a figure you can defend from the depreciation schedule and the actual condition of the goods, write it into the purchase agreement, and tell your intermediary so the exchange documents cover the real property alone.

Worked example: $40,000 allocated to contents on a furnished rental sale

Hypothetical, round numbers; confirm the allocation and the rate with your CPA or attorney. You furnished a short-term rental for $60,000 and expensed the whole amount under the 100% special depreciation allowance that Publication 946 restores for qualifying property acquired after January 19, 2025, so the adjusted basis of the contents is zero.

You sell the property for $1,500,000 and the contract allocates $40,000 to furnishings. Recomputed basis is the $60,000 of cost, the amount realized on the contents is $40,000, and §1245 makes the lower figure minus a zero basis — the full $40,000 — ordinary income. At a 32% marginal rate that is $12,800, due in the year of sale no matter how clean the exchange is.

The remaining $1,460,000 is the real property that flows through the exchange. Had you allocated $10,000 instead, the ordinary income would be $10,000 and $1,490,000 would carry into the replacement — which is why the allocation deserves more attention than it usually gets.

• Section 1245 recapture is capped at the depreciation actually taken, so contents that cost $60,000 can never produce more than $60,000 of ordinary income.
• Contents gain does not qualify for the 25% real-property rate; it is taxed at your bracket.
• A cost segregation study on the building carved §1245 components out of it years ago, and those components are sold the same way (bonus depreciation and cost segregation).

On the buy side, contents inside the 15% ceiling are still boot on line 15

If your replacement is another furnished unit, the value of the furnishings you receive goes on Form 8824 line 15 alongside cash received and net liabilities assumed, and the recognized gain on line 20 is capped by whichever is lower, that total or your realized gain. Passing the 15% test protects the structure of the exchange, not the tax bill.

There are two clean fixes. Ask the seller to convey the contents at a nominal price with the real property priced accordingly, or buy the furnishings outside the exchange with your own funds, which keeps the exchange money entirely in real property (adding your own cash).

Whichever you choose, the boot is measured at fair market value, not at the contract number, so a $1 allocation on a fully furnished unit invites the question rather than settling it. The wider definition of boot is in what is boot.

Where this bites hardest: hotels, car washes, storage and heavily furnished short-term rentals

The share of value in equipment decides how much of your sale escapes the exchange. A hotel's FF&E schedule, a car wash's tunnel and vacuum equipment, and a storage facility's gates and kiosks can be a meaningful slice of the price, which is why these sales need the allocation set at the letter of intent rather than at closing. See selling a hotel or motel, a car wash, a self-storage facility and a short-term rental.

One route around the problem is a replacement with no contents attached. A Delaware Statutory Trust interest is a fractional interest in real property, so your exchange dollars buy real estate and nothing else; the trust holds any equipment inside its own structure. Start with the traditional DST and what you own in a DST.

We broker 1031 exchanges into offerings from vetted national DST sponsors — over a billion dollars of them across twenty-plus years — under a regulated broker-dealer framework, licensed state by state across all fifty.