Section 1031 applies to qualifying real property held for productive use in a trade or business or for investment. Property held primarily for sale, such as inventory held by a dealer, is generally outside that rule. Personal-use property, such as a primary residence used as a home, does not qualify simply because it is real estate. A property’s actual use and the taxpayer’s circumstances matter. [1][2]

“Like kind” Does Not Mean Identical

For real property, the like-kind requirement leaves room for differences in location, condition, and development. An older building does not have to be replaced with another older building, and an urban property does not have to be replaced with property in the same setting. The IRS focuses on the nature or character of the real estate rather than its grade or quality. Its examples include exchanging city real estate for a farm or ranch, or improved real estate for unimproved land, when the properties otherwise meet the exchange requirements.

For example, an investor who owns a downtown commercial building might exchange it for farmland leased to an agricultural operator. Although the properties have different uses, tenants, and maintenance needs, those differences generally do not prevent them from being like-kind. Similarly, land held for investment may be exchanged for a developed rental property. “Improved” simply means the real estate has buildings or other improvements; it does not mean the property is a better investment.

This flexibility gives investors room to consider properties that better fit their goals. However, meeting the like-kind requirement does not establish that the replacement property offers comparable income, risk, or value. An investor moving from a leased building to vacant land, for instance, may be giving up current rental income in favor of potential appreciation. The tax qualification and the investment decision each require their own evaluation.

Location Matters

Although the like-kind rules allow flexibility among property types, they draw a firm distinction between U.S. and foreign real estate. Real property located in the United States is not considered like-kind to real property located outside the United States. This restriction applies even when both properties serve the same business or investment purpose.

For example, exchanging a rental home in Missouri for a rental condominium in Mexico would not qualify for tax deferral under Section 1031. The fact that both properties generate rental income does not overcome the location requirement. By comparison, exchanging that Missouri rental home for qualifying investment property in Florida may satisfy the like-kind requirement—the replacement property does not have to be in the same city or state. All other exchange requirements would still apply.

The property’s physical location controls this distinction. Purchasing foreign real estate through a U.S.-based LLC does not turn it into U.S. real property for exchange purposes. Investors considering an overseas purchase should therefore account for the potential tax on their domestic sale rather than assuming that reinvesting the proceeds abroad will defer it.

The Owner Matters Too

When several investors own real estate through an entity, the exchange decision generally belongs at the entity level. Before planning an exchange, it is important to establish who owns the property for federal tax purposes and what is being sold: the real estate itself or an investor’s ownership interest in the business. These are different assets, even when the entity’s only asset is a building. Federal regulations generally exclude partnership interests from qualifying real property under Section 1031.

For example, suppose three investors own an LLC taxed as a partnership, and the LLC owns a warehouse. If the LLC exchanges the warehouse for another qualifying investment property, the exchange generally occurs through the LLC. But if one investor sells their membership interest to the other two, that investor is selling an interest in the entity—not a portion of the warehouse directly. Buying another investment property with those proceeds generally would not turn the membership-interest sale into a qualifying 1031 exchange.

This distinction also matters when owners have different goals. One investor may want cash while the others want to continue investing through an exchange. Those preferences require advance planning; each investor cannot simply assume they can direct their share of the entity’s sale proceeds into a separate personal exchange.

A narrow exception exists for certain qualifying arrangements with a valid election under Section 761(a) to be excluded from all federal partnership tax rules in Subchapter K. For Section 1031 purposes, those interests may be treated as interests in the underlying assets. This is a technical exception with specific eligibility requirements, so an ordinary partnership or syndication should not assume it applies.

A Note For Syndication Investors

A real estate syndication may own real property, while its investors own partnership or LLC interests. Those are different legal and tax interests. An investor should not assume that selling a syndication interest and reinvesting the proceeds qualifies for a 1031 exchange merely because the entity owns real estate. If an exchange strategy is being considered, the investor should consult the sponsor and independent tax counsel well before a sale; do not rely on general marketing materials to decide eligibility.

Build An Eligibility Checklist With Your Adviser

Before planning around an exchange, gather the deed and ownership records, entity documents, use history, purchase and improvement records, depreciation information, debt details, and the proposed sale timeline. Your tax adviser can assess whether the property and taxpayer meet the rules and what additional questions apply.

This article provides general information, not tax, legal, or investment advice. Eligibility depends on facts and current law. Consult a CPA or tax attorney about your situation. Vorsa Investments does not represent that an investment it offers is eligible for 1031 exchange treatment.

These primary sources support the general federal tax explanations in the drafts. Review the current law, IRS publications, and transaction-specific facts with a qualified tax professional before relying on them.

1. Internal Revenue Code Section 1031 — https://uscode.house.gov/view.xhtml?req=%28title%3A26+section%3A1031%29

2. IRS Instructions for Form 8824 (2025) — https://www.irs.gov/instructions/i8824

3. IRS Publication 544, Sales and Other Dispositions of Assets (2025) — https://www.irs.gov/publications/p544

4. IRS About Form 8824, Like-Kind Exchanges — https://www.irs.gov/forms-pubs/about-form-8824

5. Treasury Regulation 1.1031(a)-3, Definition of Real Property — https://www.ecfr.gov/current/title-26/section-1.1031(a)-3