What does not qualify for a 1031 exchange?

The gate narrowed on 1 January 2018, and most disqualifiers now fail at that step

Before 2018 the section covered many kinds of property and carried a long list of carve-outs. Now section 1031(a)(1) speaks only of "real property held for productive use in a trade or business or for investment" exchanged "solely for real property of like kind," which means the old list has mostly been made redundant by the gate itself.

The IRS states the change in its own words: after the Tax Cuts and Jobs Act, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets no longer qualify for non-recognition, effective 1 January 2018, with a transition rule for exchanges completed by 31 December 2017.

One eccentric survivor stayed behind: the IRS confirms that certain exchanges of mutual ditch, reservoir or irrigation stock remain eligible, and Treas. Reg. 1.1031(a)-3 lists those shares among the intangible interests treated as real property.

Inside real property, one exclusion is still written into the statute

Section 1031(a)(2) is now a single sentence and it is aimed at dealers: the subsection does not apply to any exchange of real property held primarily for sale. The IRS restates it as a live rule, not a historical one.

The weight sits on one word, and the Supreme Court fixed its meaning in Malat v. Riddell, 383 U.S. 569 (1966), holding that "primarily" means "of first importance" or "principally" and rejecting the government's argument that a merely substantial sales purpose was enough.

This is the filter that catches flips, wholesale assignments, subdivided lots sold off and inventory of every kind. Can I 1031 exchange a fix-and-flip? works through the factors an examiner applies.

Securities are out because a share is not land, whatever the share owns

A publicly traded REIT holds real estate, but you would receive stock, and stock is not real property under Treas. Reg. 1.1031(a)-3. The same reasoning removes bonds, notes, evidences of indebtedness, mutual funds and interests in a partnership or a limited liability company that is treated as a partnership.

That last one surprises people who have spent years in syndications, because the fund owns buildings and issues K-1s. What you hold is an equity interest in an entity, which is why Can I 1031 into a syndication, real estate fund or LLC interest? exists as its own page, and why limited partners planning an exit read 1031 exit options for limited partners first.

There is a route into REIT ownership, but it runs the long way around through a trust and a section 721 contribution rather than through section 1031; Can you 1031 into a REIT? sets out the path and its one-way door.

Anything you live in, and anything held for personal use

Rev. Rul. 59-229 shuts the door on swapping one home for another, since neither side of that trade is being held for business or for investment. The Ninth Circuit put it more bluntly in Starker: "it has long been the rule that use of property solely as a personal residence is antithetical to its being held for investment."

Hoping the house appreciates does not convert it, as the owners in Moore v. Commissioner, T.C. Memo. 2007-134 found when two unrented holiday houses were traded and the court refused to read investment intent into a residence they occupied. Its words were that a "mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence."

The alternative is section 121, and a second home can be rehabilitated into qualifying property by actually renting it. Both routes are set out at Can I 1031 exchange my primary residence or second home?.

The border, and what is not really a disqualifier at all

Section 1031(h) states that real property located in the United States and real property located outside the United States are not property of a like kind. Two American parcels are always of like kind to one another whatever their type, which is why crossing a state line is a non-issue and crossing the national border is fatal; Can I 1031 exchange into a property in another state? covers the first and foreign property and the territories the second.

Several things people assume are disqualifiers are not. Grade, quality, asset class, whether the property is improved, whether there is debt on it and who manages it are all irrelevant to qualification, as Can I sell a rental house and 1031 into commercial property, land or a DST? shows.

Failing a procedural rule is also a different problem from failing a property test: a deal that misses day 45 or lets you touch the money is a broken exchange of qualifying property, and belongs at What disqualifies a 1031 exchange?.

The fractional and intangible interests that do qualify

Treas. Reg. 1.1031(a)-3 promotes several holdings that look nothing like a deed into real property in their own right, which is how a seller of one building lands somewhere unexpected and still inside the section.

The most useful of them for a seller who wants out of management is the Delaware Statutory Trust, which Rev. Rul. 2004-86 rescued from the certificate-of-trust exclusion by reading a properly restricted trust as a pass-through to the bricks underneath. Can I sell a rental house and 1031 into commercial property, land or a DST? sets that list of qualifying holdings out in full.

Because classification turns on the documents rather than on what anyone calls the asset, run the specific offering past your CPA or attorney first.

• Undivided co-ownership, which is what a TIC interest gives you
• A qualifying DST beneficial interest — our traditional DST page
• Long leaseholds, purchase options and easements over someone else's land
• Development rights severed from the land, and co-op housing corporation stock
• Mutual ditch, reservoir and irrigation shares, on the regulation's own conditions