What Can You Purchase With 1031 Exchange Funds?

Posted Nov 16, 2022

what you need to know about combining a 1031 exchange and a section 121-1186614184

We’ve written extensively about 26 U.S. Code § 1031 – “Exchange of Real Property Held for Productive Use or Investment.” Previous blog posts explained that the 1031 exchange – also known as the like-kind exchange – can be used to help defer taxes on capital gains resulting from real estate sales.  

But if you’re considering using the like-kind exchange, exactly what can you purchase with 1031 exchange funds once your relinquished property sells?  

Only Real Estate 

At one time, the 1031 exchange could be used to defer capital gains taxes on personal property assets like off-lease assets, patents, and other intellectual property, collectibles, and vehicles. But that changed with the passage of the Tax Cuts and Jobs Act of 2017, which excluded personal property from 1031 exchange eligibility. These days, only real estate can be eligible for the like-kind exchange. 

Nor can this be any old real estate. Both the relinquished and replacement properties must be bought and held either for use in business or for investment. For example, you can’t use your 1031 exchange funds to buy your dream vacation home, unless that vacation home will be used solely as a rental property and not primarily for personal use. 

However, you could use those funds to buy a single-family home – as long as that home is NOT for personal use and will be rented out to someone else. 

Defining “Like-Kind” 

Funds from your 1031 exchange can only be used to buy replacement properties, pay closing costs or pay off a deed of trust or mortgage that covers your relinquished property. Furthermore, the replacement property needs to be of equal or greater value than your relinquished property. 

Within that scope, however, “like-kind” is pretty broad. You don’t have to exchange a quadraplex for another quadraplex, for example. You could exchange that quadraplex into a small retail center, as long as it is of equal or greater value, and is held for business or investment purposes. 

Your potential replacement properties can include: 

This means you could exchange your direct ownership of a fee-simple real estate property into passive, fractional DST ownership. 

In addition to the above, mineral leases/rights and water rights could be eligible for a like-kind exchange.  

Following the Rules 

While the 1031 exchange can be helpful for potentially deferring capital gains taxes, it’s important to ensure that you follow all deadlines and property requirements. Be sure to work with a financial advisor and/or tax professional who has experience with conducting like-kind exchanges.  


This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. 

All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. 

Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. 

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment. 

Because they are private placements, TICs are illiquid securities. There is no secondary market for TIC investments. Moreover, the form of ownership may require unanimous consent to sell a TIC interests. 

Like any investment in real estate, if a TIC property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. 

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. 

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