A common misconception about 1031 exchanges is that you must exchange one property for another property that looks almost exactly the same. That’s not necessarily the case. Under the 1031 rules, many types of real property can qualify as like-kind if the properties are held for investment or for productive use in a trade or business.
This means an investor may be able to exchange land for a commercial property, a rental property for another investment property, or one commercial building for a different type of qualifying real estate. The properties don’t necessarily have to be the same type or serve the same purpose.
For example, an investor selling a piece of investment land may potentially use a 1031 exchange to acquire an apartment building or commercial property. What matters is whether both properties meet the requirements for a qualifying exchange, not whether they are identical.
There are still important rules to follow, including how the properties are held and how the exchange is structured. Your personal residence, for example, generally doesn’t qualify simply because it is real estate. If you’re considering selling an investment property, it’s worth discussing your plans with a qualified intermediary and tax professional before the sale takes place.