---
title: Investment Properties That Don't Qualify For a 1031 Exchange
description: Despite the flexibility allowed in a like-kind exchange, certain investment properties and assets do not qualify, and may be subject to taxes.
---

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# [Investment Properties That Don't Qualify For a 1031 Exchange](https://www.realized1031.com/blog/investment-properties-that-dont-qualify-for-a-1031-exchange)

 Written by [The Realized Team](https://www.realized1031.com/blog/author/the-realized-team) | Jun 8, 2016

When you sell an investment property for more than what you paid for, you will likely incur a [capital gain](https://www.realized1031.com/education/glossary/capital-gain) and have to pay taxes on it at the time of sale. However, [Internal Revenue Code Section 1031](https://www.realized1031.com/education/glossary/1031-exchange) provides an exception to this rule if you reinvest your capital gains into a similar property. This type of transaction is referred to as a “[like-kind exchange](https://www.realized1031.com/education/glossary/like-kind-exchange)," allowing you to defer the taxes you would have otherwise had to pay. Fortunately, the exchange rules are fairly broad and allow investors a great deal of latitude in their choices.

**So what exactly qualifies?**

In order for your exchange to be completely tax-deferred, the property you sell and the property you purchase must have certain qualities.

- The purpose of both properties must be exclusively for investment or business use. Properties for personal use, such as your primary residence or vacation home, generally do not qualify for a 1031 exchange—though there are exceptions.

- Both properties must be like-kind, which means they are of the same character or nature, even if they differ in grade or quality. There is a great deal of flexibility within this definition. Properties do not need to be of the same type, nor located in the same state. For example, a rental home in California may be exchanged for an industrial building in Virginia; raw land in Michigan may be exchanged for a retail building in Texas.

**What does not qualify?**

Despite the flexibility allowed in a like-kind exchange, certain assets do *not* qualify. Sales or purchases that do not meet all of the exchange requirements are subject to taxes in the year they sell. These include:

- Transactions involving non-real estate assets such as inventory, stocks and bonds, notes or loans, or certificates of trust usually do not qualify for a tax-deferred exchange. However, oil and gas rights are typically considered like-kind.

- Property held primarily for resale also does not meet the requirements. Example include “fix-and-flip” homes and land development (land subdivided and sold off as individual lots).

- Partnership interests do not qualify. However, the partnership itself may exchange one property for another. Note that there may be options for investors seeking to exchange out of or into a partnership

A 1031 exchange can be a powerful investment tool, allowing investors to grow their wealth on a tax-deferred basis. However, bear in mind that there are several like-kind exchange rules that must be followed to complete a valid exchange. We encourage interested investors to consult their accountant and financial advisors prior to selling their investment properties. 

[View full post](https://www.realized1031.com/blog/investment-properties-that-dont-qualify-for-a-1031-exchange)

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