Like-kind is the requirement that both the relinquished and replacement property in a 1031 exchange be real property held for investment or use in a trade or business, and since the Tax Cuts and Jobs Act took effect, Section 1031 applies only to real property. Personal property exchanges, which once qualified under the same rules, no longer defer under Section 1031 at all. For an East End investor, this generally means the standard is easier to satisfy than the term suggests, because nearly any type of real property can be exchanged for nearly any other type, as long as both are held for investment or business use rather than personal use.
Real Property Is Interpreted Broadly
An investor can exchange a Montauk retail building for a Southampton multifamily property, a Bridgehampton industrial parcel for a Sag Harbor office building, or raw land for an improved commercial building, and all of these qualify as like-kind because they are all real property held for investment. The standard does not require similar use, similar size, or similar property type. It requires only that both sides of the exchange be real property held for a qualifying purpose, which is a much lower bar than many investors expect going in.
What Does Not Qualify
Primary residences and second homes used predominantly for personal purposes generally fall outside Section 1031, since the property has to be held for investment or business use, not personal enjoyment. This distinction matters on the East End, where a property can carry a mixed history of personal use and rental income. A vacation property that was occasionally rented but primarily used by the owner is a weaker candidate for exchange treatment than a property held consistently as a rental or commercial asset, and the difference can turn on how the property was actually used and reported, not just on its physical characteristics.
Real Property Components and Fixtures
The current regulations define real property to include land, permanent structures, and certain structural components, but the line around fixtures and equipment can get complicated in a mixed-use or hospitality transaction. A sale that bundles real property with furniture, equipment, or inventory needs the purchase agreement to allocate value clearly between the real property portion, which can qualify for exchange treatment, and the personal property portion, which cannot and is treated as boot.
Foreign Property Does Not Qualify
Real property located outside the United States is not like-kind to property located within the United States, so an investor cannot exchange a domestic Hamptons property for property abroad and expect deferral, regardless of how similar the two properties might otherwise be. This rule surprises some investors who assume the like-kind standard is purely about the type of asset rather than also depending on where it sits.
Confirming Like-Kind Status Before Making an Offer
Because the like-kind standard turns on how a property has actually been held and used, not just on its physical form, reviewing the ownership and use history of a candidate property before submitting an offer avoids finding out about a problem late in the exchange window. This is particularly relevant on the East End for properties that have shifted between seasonal rental use and owner occupancy over the years, or for a parcel carrying a mixed commercial and residential history. A short review of prior tax returns, rental records, or the current certificate of occupancy for a candidate replacement property can confirm its qualifying use before it consumes one of a limited number of identification slots.
Frequently Asked Questions
Does a commercial building have to be exchanged for another commercial building
No, the like-kind standard for real property is broad. A commercial building can be exchanged for raw land, multifamily property, or any other type of real property held for investment or business use, since property type and use do not have to match.
Can personal property still be exchanged under Section 1031
No, personal property exchanges no longer qualify for deferral under Section 1031 following the Tax Cuts and Jobs Act. The provision now applies only to real property.
Does a vacation home qualify as like-kind property
Only if the property is genuinely held for investment or business use rather than predominantly for personal enjoyment, which depends on how the property was actually used and reported, not simply on its location or type.
Can East End real property be exchanged for property in another state
Yes, like-kind real property held for investment can be exchanged across state lines within the United States. The requirement is about the nature of the property and its use, not its geographic location within the country.
Does raw land qualify as like-kind to an improved commercial building
Yes, raw land held for investment and an improved commercial building are both real property held for a qualifying purpose, so they satisfy the like-kind standard even though one is unimproved and the other is developed.
