Like-kind is one of the most misunderstood terms in a 1031 exchange, mostly because it sounds like it should mean similar property, a rental for a rental, an office for an office. It doesn't. Since the Tax Cuts and Jobs Act narrowed Section 1031 to real property only, like-kind now covers almost any real estate held for investment or business use exchanged for almost any other, regardless of type, class, or use, as long as both sides are real property and both are held for the right purpose. A Rhode Island investor can exchange a multifamily building in Pawtucket for raw land in South County, or a retail strip in Cranston for an industrial building near the port, and both qualify as like-kind.
What actually disqualifies a property has almost nothing to do with its physical type and everything to do with how it's held and used.
Held for Investment or Business Use Is the Real Test
The qualifying question is whether both the relinquished and replacement property are held for productive use in a trade or business, or for investment. A rental property, a commercial building, raw land held for appreciation, and an owner-occupied commercial building used in the owner's own business all satisfy this test. What doesn't is property held primarily for personal use or property held primarily for resale, meaning inventory. This is why a house flipper's inventory of properties generally can't be exchanged under Section 1031, even though the properties themselves are ordinary real estate, because the holding purpose is resale, not investment.
A Personal Residence Doesn't Qualify
A primary residence fails the like-kind test on its face, since it is held for personal use rather than investment or business purposes. A second home used exclusively for personal enjoyment generally fails the same way. The exception is a vacation property that has genuinely been converted to rental use, with real rental activity and limited personal use documented over time, which can sometimes qualify if the investment-use character is well established before the exchange, not adopted the week before closing.
What Excluded Property Looks Like in Practice
Beyond personal-use property, Section 1031 excludes several categories that occasionally trip up investors who assume any asset qualifies. Stocks, bonds, partnership interests, and other securities do not qualify, even when they represent an indirect stake in real estate. Property located outside the United States does not qualify for exchange against domestic property. And inventory or property held primarily for sale, such as a builder's spec homes, is excluded regardless of how long it's been held, because the holding purpose, not the calendar, is what controls.
Vacant Land and Ground Leases Both Qualify
Vacant land held for investment is treated the same as improved real property for like-kind purposes, which means a Rhode Island investor can exchange a developed apartment building for raw land, or the reverse, without either side losing eligibility. Long-term leasehold interests of 30 years or more, including renewal options, are also treated as like-kind to a fee interest in real property, which opens ground lease structures as a legitimate replacement option for investors who want exposure to real estate without owning the underlying land outright.
Mixed-Use and Fractional Interests
A mixed-use property, part retail on the ground floor with residential units above, still qualifies as a single like-kind asset as long as the whole property is held for investment or business use rather than a mix of personal and investment purposes. Fractional ownership structures raise a separate question entirely, since a tenancy-in-common interest in real property generally qualifies as like-kind, while an interest in a partnership or LLC that owns real estate does not, even though the underlying asset in both cases is the same building. That distinction, direct ownership versus an entity interest, is one of the more common places investors misjudge whether a proposed replacement actually qualifies.
Common 1031 Exchange Questions
Do you have to exchange the same type of property, like an apartment for an apartment?
No. Since the current rules apply to real property broadly, an apartment building can be exchanged for land, retail, industrial, or nearly any other real property type held for investment or business use.
Can you exchange a Rhode Island property for one in another state?
Yes, like-kind treatment applies across state lines within the United States. Location doesn't affect eligibility, only the property's use and holding purpose do.
Does raw, undeveloped land qualify as like-kind property?
Yes, vacant land held for investment qualifies the same as improved property, and can be exchanged for or into developed real estate without losing eligibility.
Can you do a 1031 exchange on a vacation home?
Only if the property has been genuinely converted to investment or rental use, with real rental activity and limited personal use over a meaningful period. A vacation home used mainly for personal enjoyment does not qualify.
Does a 1031 exchange work for a house you're flipping?
Generally no. Property held primarily for resale, meaning inventory, is excluded from Section 1031 regardless of how attractive the physical property might otherwise look as an exchange candidate.
