Incidental Property Rule (15%)

Two tests, and a regulation example built on an apartment building

Paragraph (c)(5) applies "solely for purposes of" the identification rules. Property is incidental to a larger item if, in standard commercial transactions, it is typically transferred together with that item, and if the aggregate fair market value of all incidental property does not exceed 15% of the larger item.

Example 2 uses an apartment building worth $1,000,000. Furniture, laundry machines and other personal property worth no more than $150,000 are not separate property. For the three-property rule the building and its contents are one property, and naming the building in the identification notice describes the contents too.

Example 1 makes the same point at small scale: a spare tire and tool kit worth up to $1,500 go with a $10,000 truck.

Since 2018 the rule organizes the identification, not the tax result

Section 1031(a)(1) now covers only real property exchanged for real property, for exchanges completed after December 31, 2017. Furniture or equipment received with a building is not like-kind, even when it is incidental for identification purposes.

Paragraph (g)(7)(iii) deals with that personal property inside the exchange. Personal property that generally results in gain recognition under section 1031(b) is disregarded when testing whether your rights to the exchange funds are properly limited, if it is typically transferred with the real property and worth no more than 15% of the replacement real property. The Form 8824 instructions restate this 15% limitation.

So the furniture does not break the intermediary safe harbor, but its value can still be taxable; our answers on furniture in a furnished rental and what boot is cover the tax.

Worked example and where it bites

Hypothetical: you identify a furnished vacation rental worth $800,000 that comes with $60,000 of furnishings. The furnishings are 7.5% of the property, so the rental and its contents are one property on your list. If the furnishings were worth $150,000, they would exceed 15% of $800,000, which is $120,000, and would count as a second property needing its own description. Run your own numbers with your CPA.

The 15% is an aggregate across all incidental items, measured against the larger property. Sellers of vacation rentals and hotels should get a furniture value in writing before day 45. Items that are not typically transferred with that kind of property in standard commercial transactions fail the first test whatever their value, and count as separate properties. Keep the furniture value on the closing documents consistent with the figure you relied on, because the same number drives the taxable portion.