Like-Kind Property Explained

Like-kind is the broadest and most misunderstood term in the whole 1031 exchange framework. It doesn't mean an investor has to trade an industrial building for another industrial building, or a rental house for another rental house. Since the 2017 tax law changes, 1031 treatment applies only to real property, but within real property the like-kind standard is remarkably wide, and understanding just how wide it is opens up replacement options in El Paso that many investors don't realize are available.

Before 2018, personal property like equipment, vehicles, and certain business assets could also qualify for 1031 treatment. That's no longer true. Current law limits like-kind exchanges to real property only, which means an investor selling a business along with real estate can no longer defer gain on the equipment or fixtures through a 1031 exchange, only on the real property itself. This matters for El Paso business owners selling an operating property, a manufacturing facility with attached equipment, for instance, since the exchange calculation now has to separate the real property value from everything else.

Within real property, like-kind is defined by nature and character, not by grade, quality, or specific use. This is the part that surprises investors most.

• Raw land can exchange for an improved industrial building
• A retail strip center can exchange for an apartment complex
• A single-tenant net-lease property can exchange for a fractional interest in a larger asset
• An office building can exchange for farmland or a Delaware Statutory Trust interest
• Property held anywhere in the United States can exchange for property in a different state or region

The common thread is that both properties must be held for investment or business use, not personal use, and both must be real property under the current definition. An investor selling a Northeast El Paso retail pad and buying Lower Valley industrial land isn't just permitted to make that switch under the like-kind standard, it's a routine kind of exchange.

The like-kind standard for property type is generous, but the use requirement is not flexible. Both the relinquished and replacement property have to be held for investment or use in a trade or business, which excludes a primary residence, most vacation homes used personally, and property held primarily for resale, like a fix-and-flip. An investor's rental property, industrial building, or commercial land in El Paso qualifies because it's held to generate income or appreciation, not because it fits a specific property type category. A property held mixed-use, part rental and part personal, only qualifies on the investment-use portion.

Like-kind exchanges have no geographic restriction within the United States, so an El Paso investor can exchange local property for replacement property anywhere in the country, and an out-of-state investor can exchange into El Paso just as easily. What the standard does not cover is property outside the United States; real property in Mexico, even directly across the border in Ciudad Juarez, does not qualify as like-kind to U.S. real property under Section 1031. That distinction matters in a border market where cross-border ownership and investment interest are common, and it's worth confirming with a tax advisor before assuming a cross-border swap could work.

The most frequent error isn't picking a property that fails the like-kind test outright, it's misjudging the use requirement on the relinquished side, treating a property that's actually held for resale or personal use as investment property. A second common mistake is assuming a DST interest or a fractional ownership stake doesn't count as real property; when structured correctly, it does. A third is assuming a swap has to stay within the same property type, industrial for industrial, when in fact a Fort Bliss-area apartment building trading into cross-border industrial space is just as valid under the like-kind standard as trading into another apartment building.