Like-Kind Property Explained

Like-kind is the term the tax code uses to describe what qualifies as a valid replacement property, and it's far broader than the phrase suggests. It does not mean a similar building type or a comparable price. Since 2018, the like-kind requirement under Section 1031 applies only to real property held for investment or business use, but within that category, an apartment building can exchange into raw land, a retail strip can exchange into an industrial warehouse, and a Manhattan office condo can exchange into a self-storage facility in Suffolk County, all of it treated as like-kind.

Real property includes land and anything permanently attached to it, along with certain interests in real property such as leasehold interests of thirty years or more. It does not require the properties to be the same asset class, the same size, or even in the same state. A seller exchanging a Bronx multifamily building into an industrial property in New Jersey or a retail center in another state has not violated the like-kind rule at all, since the geographic location of the replacement property is not part of the definition.

Fixtures and structural components attached to the land, such as a parking structure, loading docks, or a building's mechanical systems, are generally treated as part of the real property rather than as separate personal property, which matters for sellers exchanging an asset with substantial site improvements accumulated over years of ownership.

What actually limits eligibility is use, not type. Both the relinquished and replacement properties need to be held for investment or for use in a trade or business, which excludes a primary residence or a second home used mostly for personal enjoyment. A New York investor selling a rented multifamily building qualifies; a homeowner selling a personal residence in Rye or Tarrytown does not, regardless of how much the property appreciated. Property held primarily for resale, such as a house purchased and renovated to flip quickly, also generally falls outside the like-kind framework because it's treated as inventory rather than an investment asset.

Personal property, which used to have its own like-kind category before the 2018 changes, no longer qualifies for exchange treatment at all. That includes equipment, vehicles, artwork, and similar assets separate from real estate. Stocks, bonds, partnership interests, and most securities have never qualified as like-kind property. Foreign real property also does not exchange with property located in the United States; a New York seller cannot exchange domestic real estate into an overseas property and expect the transaction to defer under Section 1031.

A seller who owns a New York building through a single-member LLC generally still qualifies, since a disregarded entity is treated as the individual owner for tax purposes, but a multi-member LLC or partnership interest itself cannot be the asset exchanged, only the underlying real property the entity holds, which is a distinction worth confirming with a tax advisor before a sale involving co-owners.

Because the definition is based on use rather than asset type, an investor selling a smaller residential rental in Queens or Staten Island has real flexibility to pursue a completely different asset class as a replacement, medical office, industrial, or a net-leased retail property, without that shift disqualifying the exchange. This is useful for sellers looking to diversify out of a management-intensive property type into something with a different tenant profile, since the like-kind rule itself puts almost no restriction on that kind of strategic shift.

A landlord tired of the turnover and repair calls that come with a multifamily building in Flushing or Jamaica can exchange into a single-tenant net-leased property with far less day-to-day management, and the like-kind rule places no obstacle in the way of that kind of change, since both properties remain real estate held for investment regardless of tenant count or lease structure.