The Best Types of Properties for a 1031 Exchange

05/14/2025

Industry Insights Deal Book

In the world of U.S. real estate investing, Section 1031 like-kind exchanges offer a powerful way to defer capital gains taxes and strategically reposition portfolios. A critical success factor, however, is choosing the right kind of replacement property. Sophisticated investors, brokers, and commercial real estate professionals often ask nuanced questions about which properties work best in a 1031 exchange. Below, we provide authoritative answers to the most frequently asked questions (as seen in Google’s “People Also Ask” suggestions) on this topic, drawing on expert insights in commercial real estate, capital markets, and luxury property investments.

What types of properties qualify for a 1031 exchange?

Broadly speaking, any real estate held for investment or business use can qualify as “like-kind” property in a 1031 exchange. The IRS rules define like-kind in terms of the property’s nature or character, not its grade or quality. This means virtually all real property is considered like-kind to other real property as long as both the relinquished and replacement assets are held for productive use in a trade or business or for investment purposes (Accruit )(Exclusive Financial Resources) . For example, you can sell an apartment building and exchange into a farm, an office, a warehouse, or even vacant land. A rental single-family home could be exchanged for a retail center or a parcel of industrial land – the specific property type doesn’t need to match, as long as it’s real estate held for investment . This flexibility allows investors to reposition from one sector to another (residential to commercial, or vice versa) without immediate tax impact.

That said, properties must meet the “held for investment or business use” requirement. Real estate that the owner holds primarily for personal use or for quick resale will not qualify. A primary residence or a second home used mostly for personal enjoyment is generally ineligible for 1031 treatment (though there are special cases discussed later). Likewise, fix-and-flip properties or inventory held by a developer do not qualify because they are considered “stock in trade” held for sale ( Revilo Group ). The IRS explicitly excludes certain assets from 1031 exchanges, including stocks, bonds, partnership interests, and foreign real estate Irs . In practice, this means you cannot exchange into securities or shares of a REIT, and you cannot swap U.S. real estate for property abroad. The 2017 Tax Cuts and Jobs Act further tightened the rules by limiting 1031 exchanges to real property only – personal property (like machinery, equipment, artwork, or franchise licenses) no longer qualifies. In summary, if the property is real estate in the United States held for investment or business use, it can likely be part of a 1031 exchange, whereas personal-use assets and dealer properties cannot.

What are the best properties for a 1031 exchange?

The “best” replacement property depends on your investment goals, but typically it’s one that aligns with your financial objectives, risk profile, and management preferences. An ideal 1031 exchange property will balance growth and income in a way that suits the investor’s strategy Re-transition . Here are some of the most popular types of investment properties that seasoned investors often target in a 1031 exchange:

Multi-Family Apartment Buildings: Multi-family rentals (from small apartment complexes to large multifamily communities) are frequently favored in 1031 exchanges for their combination of steady cash flow and potential appreciation. Apartments tend to be “recession-resistant” – people always need housing – and they allow for risk-spreading across multiple tenants. Investors can use a 1031 to scale up from a smaller rental to a larger apartment property, increasing net operating income and resetting depreciation benefits. For example, an exchanger might sell a fourplex and invest into a 50-unit apartment building in a growing market, aiming for higher overall returns. Do keep in mind that multi-family ownership is management-intensive: more units mean more tenants, leases, and maintenance to handle. High-level investors often mitigate this by hiring professional property managers or by exchanging into a fractional ownership structure (like a Delaware Statutory Trust) that holds multi-family assets for them.
Triple-Net (NNN) Leased Commercial Properties: Single-tenant NNN properties – such as free-standing retail stores (drugstores, fast food restaurants, dollar stores), bank branches, or industrial facilities leased on a long-term triple-net basis – are considered “trophy” 1031 targets for those seeking passive income. In an NNN lease, the tenant is responsible for property taxes, insurance, and maintenance, leaving the landlord with net rent checks and minimal management duties ( KPI 1031 ) . Many investors who are tired of the hassles of active landlording (the “tenants, toilets, and trash” of residential rentals) use a 1031 exchange to move into NNN assets for stable, bond-like income. For instance, you might exchange out of an apartment building and into a Walgreens or Starbucks property on a 15-year lease to a high-credit corporate tenant. These properties can provide reliable cash flow with fewer surprises, though their long-term value is tied to the tenant’s financial strength and the specific lease terms (rent escalation clauses, renewal options, etc.). NNN deals are especially popular among retiring landlords and high-net-worth investors looking for preservation of capital and low-touch management.
Industrial and Logistics Facilities: Warehouses, distribution centers, and fulfillment facilities have surged in demand in recent years (driven by e-commerce and supply chain shifts), making them attractive 1031 replacement properties. Industrial real estate often features credit-worthy corporate tenants on multi-year leases, somewhat akin to NNN deals, and can offer solid cash yields. An investor might, for example, exchange a smaller retail property for a share in a large logistics center leased to an Amazon or FedEx. Industrial assets tend to have lower management overhead than residential properties and can provide diversification if your portfolio is heavy in other sectors. As always, location and tenant quality are key – the best industrial exchanges target areas with strong transportation links and tenants with robust business operations.
Retail and Mixed-Use Properties: Aside from single-tenant NNN retail, some exchangers seek multi-tenant retail centers or mixed-use developments. A neighborhood shopping center with multiple tenants or a mixed retail/office building can be a viable replacement, offering a balance of risk (diverse tenant base) and reward (value-add potential through leasing and improvements). If you’re exchanging into retail, focus on properties anchored by essential or resilient businesses (grocery stores, pharmacies, etc.) and be mindful of market trends (e.g. shifts in consumer behavior and e-commerce). Mixed-use properties in revitalizing urban areas can also be compelling for investors looking for long-term appreciation, but they require careful management and leasing expertise.
Vacation Rental and Hospitality Properties: For some investors, a 1031 exchange is an opportunity to acquire short-term rental properties or even boutique hospitality assets in desirable locations. A beachfront vacation rental or a small resort can potentially qualify (provided it’s primarily an investment, not personal use – more on that below). These properties can yield high income in peak seasons and offer the perk of some personal use, but they come with operational complexities and market volatility (tied to tourism trends). Only consider hospitality or vacation rentals in a 1031 if you have experience in that niche or plan to employ professional management, and ensure you comply with IRS rules about limited personal use.
Raw Land or Development Projects: Land can be an effective like-kind replacement if your goal is long-term appreciation or future development. Investors sometimes exchange an older building for a piece of well-located vacant land, essentially “land banking” for future gain (or to build a new project). Raw land has no depreciation benefits and produces no income, so its value lies purely in potential appreciation. It may be “best” for those with a development plan or patience for a longer-term hold. Similarly, a 1031 exchange can be used to acquire properties in need of redevelopment or improvement (via a construction/improvement exchange structure), allowing the investor to add value post-exchange. These strategies are more complex and carry development risk, but can yield significant upside if executed well.
Delaware Statutory Trusts (DSTs) and Fractional Interests: While not a property type per se, DST investments have become a popular 1031 replacement option for accredited investors. A DST is a legal trust structure that owns one or more income-producing properties (often large institutional-grade assets like multi-family complexes, medical offices, self-storage portfolios, etc.). Investors can 1031 exchange their proceeds into a DST to receive a fractional ownership share of the trust’s properties. The appeal is diversification and true passivity: DST sponsors handle all management, and the investment can be closed quickly, often within the tight 45-day identification period ( KPI 1031) . For example, by exchanging into a DST, an investor could allocate funds across a mix of, say, an Amazon-leased distribution center, an apartment community in a Sunbelt city, and a medical office portfolio – all through one exchange. The downside is lack of control (DST investors have no active say in operations) and these trusts typically require investors to be accredited. Nonetheless, DSTs are increasingly seen as “exchange-ready” solutions for those who want to defer taxes but exit the day-to-day burdens of property management.

Expert tip: There is no one-size-fits-all “best” property – the ideal replacement asset is one that meets your specific goals. Before choosing, clarify whether you prioritize immediate income (cash flow), long-term growth and appreciation, geographic or asset-class diversification, or minimizing management responsibility. For instance, a family office looking for stable income might gravitate toward a high-credit tenant NNN retail asset, whereas a growth-oriented investor might prefer a value-add apartment complex in an emerging market. Always conduct thorough due diligence on any replacement property’s financials, market conditions, and tenant stability. Many seasoned exchangers assemble a short list of options and may even identify multiple property types to ensure they have backup choices within the 45-day identification window ( Re-transition ) ( Realized1031 ).

Can I 1031 exchange a residential property for a commercial property (and vice versa)?

Yes. “Like-kind” in a 1031 exchange does not mean “same kind.” Any combination of investment real estate is permissible. You can exchange residential rental property for commercial real estate, or vice versa, without issue – all that matters is that both the old and new properties are held for investment purposes. The IRS’s broad definition of like-kind treats all U.S. real estate as compatible, whether improved or unimproved, residential or non-residential . For example, an investor could sell a small apartment building and buy an office condo, or sell a piece of raw land and roll the proceeds into a retail storefront. A farm could be exchanged for a vacation rental property (provided the vacation home is used as a rental investment). A warehouse could be exchanged for a portfolio of single-family rental homes. These are all valid swaps under 1031 rules.

This flexibility is a major benefit of 1031 exchanges – it allows investors to reposition capital into different sectors or locations as their strategy evolves. Many savvy real estate players use this to diversify their holdings or exit a declining asset class. As one example, consider a landlord who owns several residential rentals in one city but wants to reduce management headaches and hedge against an overheated housing market. He might sell those rentals and exchange into a few triple-net commercial properties across different states, thus diversifying geographically and shifting into a more passive asset class. Conversely, someone might decide to exchange out of a single big commercial building into multiple smaller residential properties to spread risk among many tenants. The like-kind rules accommodate these moves.

It’s important to note that while property type differences are allowed, the transaction must still satisfy other 1031 requirements (timeline, use of a Qualified Intermediary, etc.). Also, both properties should be in the United States – you cannot exchange domestic real estate for a foreign property, as noted earlier . Aside from that limitation, investors have free rein to change property types. In fact, the IRS has explicitly stated that you can exchange an office building for an apartment complex, a strip mall for a warehouse, or a rental house for vacant land – all are like-kind as long as they are investment real estate . So, whether you’re moving from residential to commercial, commercial to industrial, or any other combination, a 1031 exchange can facilitate the transition while deferring taxes.

Can I 1031 exchange one property into multiple properties (or vice versa)?

Yes. You are not limited to a one-for-one swap in a 1031 exchange. Investors often sell one property and acquire several replacement properties, or consolidate multiple relinquished properties into one larger replacement. The 1031 exchange regulations allow these strategies as long as you adhere to the identification and value rules. In a standard delayed exchange, you have 45 days to identify replacement properties and 180 days to close – within that framework you can designate multiple targets. The IRS provides three identification rule options: (1) identify up to three properties of any value (the “Three-Property Rule”), (2) identify more than three properties as long as their total value doesn’t exceed 200% of the value of the property you sold (the “200% Rule”), or (3) if you identify more than three and exceed 200% of value, then you must ultimately purchase at least 95% of the value you identified (the “95% Rule”) ( Accruit ). These rules are designed to give flexibility in exchanging into multiple assets.

Exchange one into many: For example, imagine you sell a single $2 million commercial building. You could use a 1031 exchange to buy three different $600,000 rental properties (totaling $1.8M) and a $200,000 piece of land, thus reinvesting the full $2M into four assets. As long as you identified those properties in the 45-day window and close on them within 180 days, you’ve successfully exchanged one property into multiple replacements. This approach is useful for diversification – you’re spreading your investment across different locations or property types – and can also be a way to incrementally deploy a large amount of equity. Many investors coming out of a highly appreciated property choose to “swap down” into several smaller properties, which might collectively offer higher combined cash flow or growth potential.

Exchange many into one: The reverse is also possible: selling multiple properties to acquire one larger asset. For instance, you might relinquish two rental condos and a small retail building, pooling the proceeds to purchase a single $3 million apartment complex. The key challenge here is timing – all relinquished properties’ sales and the replacement purchase must coordinate to fit the 180-day closing window. It often requires careful planning to line up multiple sale transactions such that you can close on the big replacement on time. A strategy some use is the reverse exchange (buying the replacement first and then selling the old properties within 180 days) if coordinating the sales is difficult. Additionally, to fully defer tax, the total value of the new property should be equal or greater than the combined value of all relinquished properties, and all the exchange funds must be reinvested ( Realized 1031 ). Any shortfall would be treated as taxable boot.

There is no strict limit on the number of properties in an exchange. You could exchange one property for two, five, or ten others (practically speaking, most stick to a few targets due to the identification rules). Likewise, you could sell several and roll into one or more replacements. The IRS cares that the rules are followed and that you use a Qualified Intermediary to hold funds between sales and purchases. Seasoned investors sometimes execute complex exchanges – for example, selling a portfolio of 10 single-family rentals and using the proceeds to buy a single office building and one DST investment as backup. So long as all transactions fall within the allowed timeframe and identification parameters, the exchange will qualify (1031 Exchange ). Keep in mind that more moving parts mean more complexity: engaging experienced 1031 advisors and brokers is wise when attempting a multi-property exchange. They can help ensure you properly identify assets, manage closing timelines, and maintain compliance throughout the process.

Does a vacation home or second home qualify for a 1031 exchange?

A vacation property can qualify for a 1031 exchange, but only if it’s predominantly used as an investment (not personal use). The IRS has a safe harbor that lays out clear criteria for when a vacation or second home is considered “held for investment” and thus eligible for tax-deferred exchange. The guidelines, issued in Revenue Procedure 2008-16, essentially require significant rental activity and limited personal use over a two-year period:

If the vacation home is the property you’re selling (the relinquished property): You should have owned it for at least 24 months prior to the exchange, and in each of the two 12-month periods immediately before the sale, you must have rented it out to another person at fair market rent for at least 14 days, and your personal use of the home cannot exceed 14 days or 10% of the days it was rented in each year ( Leader Bank ). In practice, this means the home was genuinely used as a rental investment (even if part-time) rather than purely a personal retreat. For example, a lake house that you rent to vacationers for, say, 120 days each year and only use for yourself 10 days a year would meet the safe harbor. By contrast, a beach condo you visited all summer and rented out only occasionally would likely fail the test.
If the vacation home is the property you’re buying (the replacement property): You should intend to hold and use the new property as an investment for at least 24 months after the exchange – meaning you’ll rent it out regularly and keep personal use within the same strict limits (no more than 14 days or 10% of rental days per year for the first two years) . Only after this period of bona fide rental use would it be considered safe to convert it to more personal use. So if you acquire a mountain cabin via a 1031 exchange, plan to rent it to tenants or short-term guests for most of the next two years, and keep your own vacations there to a minimum in that timeframe.

It’s worth emphasizing that these are safe harbor conditions – meeting them virtually guarantees the IRS will view the property as held for investment. If you fall short of these benchmarks, it doesn’t automatically disqualify the exchange, but you may invite closer scrutiny to prove your intent. Some investors do successfully exchange vacation homes with shorter rental histories, but they must document a clear shift to investment use. The safest course is to follow the 2-year guideline above. By doing so, many savvy individuals have leveraged 1031 exchanges to transition between vacation rental properties or even to position a future retirement home (renting it out for a couple of years first).

Important: If you eventually want to use the replacement vacation home for personal use (for example, turn it into your retirement residence), you must be patient and strategic. After renting it out per the safe harbor period, you can gradually increase your personal use. However, tax law imposes an extra rule: when a 1031 property is converted to a primary residence, you must hold it for at least five years before selling to be eligible for the homeowner capital gains exclusion (the $250K/$500K Section 121 exclusion) ( 1031 Exchange ) . In other words, you can’t 1031 into a beach house, move in after a year, and then quickly sell it to avoid taxes. You would need to own that property for a minimum of five years total, and reside in it for at least two of those years, before a sale to claim the primary home exclusion on any further gain. Even then, the exclusion won’t apply to the portion of gain that was deferred from the original exchange – that part remains taxable when you eventually sell. The takeaway is that using a 1031 exchange to acquire a personal-use home is a long-term play, not a quick tax dodge.

Despite the stricter rules, many investors do use 1031 exchanges with second homes successfully. One common strategy is the “buy your dream home” approach: an investor sells an investment property, exchanges into a house in their ideal retirement location (say a ski lodge or a beach cottage), rents it out for several years to satisfy the requirements, and later moves in as their personal residence. This way, they’ve deferred taxes on the sale of the original property and ultimately end up with their dream home, with some additional tax benefits on a future sale. The key is adhering to IRS guidelines during the rental period. Always consult with a knowledgeable 1031 exchange advisor or tax professional before attempting to exchange into a property that you eventually hope to use for personal enjoyment, because the IRS will look at your intent and use very closely in these scenarios.

Can I ever live in or personally use a property acquired through a 1031 exchange?

You can, but not immediately – and careful planning is required to stay within the rules. When you acquire a replacement property via a 1031 exchange, the IRS expects that your intent is to hold it for investment or business use, not personal enjoyment. Moving into the property or using it as a primary residence too soon after the exchange could violate the “held for investment” requirement and jeopardize your tax deferral. However, over time, circumstances can change, and the tax code does allow an investment property to convert to personal use (and vice versa) if done correctly ( 1031 Exchange) .

As a general guideline, experts often recommend holding the replacement property as a rental or business asset for a minimum of two years before considering any personal use conversion. This timeframe aligns with the safe harbor for vacation homes and also helps demonstrate to the IRS that your original intent was genuine. During this period, keep documentation of rental income, advertising for tenants, and any other evidence that you treated the property as an investment. Simply put: treat it like a rental, not your residence.

After a prudent holding period (again, many use two years as a benchmark), you may begin to use the property more personally or even move into it as your home. At that point, the property’s character changes from an investment to personal-use. There are a few things to keep in mind when you do this:

5-Year Rule for Sales: If you intend to later sell the property after you’ve moved in, remember the mandatory five-year ownership rule mentioned above to claim any primary home capital gains exclusion . Even though you’re living in it, you must wait at least five years from the date you originally acquired it via the 1031 exchange before selling, or else none of the Section 121 exclusion will be available. And even after five years, any gain attributable to the period it was an exchange property (and depreciation deductions taken while it was rented) will be taxable. This rule was put in place to prevent taxpayers from abusing exchanges to flip into tax-free home sales.
Partial Personal Use: Maybe you don’t want to move in permanently, but you’d like to use the property occasionally (e.g. a few weekends at your 1031-acquired ski cabin). Limited personal use is permissible as long as the property is primarily held for rental/investment. The safe harbor of not exceeding 14 days or 10% of rental days per year is a good yardstick in this scenario too. If you stay within those limits during the initial years, your exchange remains solid. Over time, if your personal use creeps up, be aware you’re moving into a gray area – at some point, if personal enjoyment becomes the primary purpose, the IRS could argue the original exchange was invalid. It’s wise to err on the side of caution and keep personal use to a minimum until a substantial period has passed.
Document Your Intent: Should you decide to convert an exchange property to personal use, document when and why this decision occurred (for example, a change in life circumstances, retirement plans, etc.). If ever questioned, you want to be able to show that at the time of the exchange, you fully intended to use the property as an investment (and did so for a significant period). Only later did you repurpose it for personal use, which is allowable. It’s the initial intent that counts most. Engaging a tax advisor before converting the use can help you structure things properly (they might advise, for instance, formally changing how the property is reported on tax returns, from a rental schedule to personal, after a certain date).

In summary, you can eventually live in or enjoy a property obtained through a 1031 exchange, but you must plan ahead and respect the timelines and rules to protect your tax-deferred gains. Many investors have done this successfully – turning a rental into a retirement home – but they did so by first treating it unequivocally as an investment property for a suitable duration. Always consult your CPA or attorney for guidance, because improper personal use of an exchange property is a common pitfall that can unravel the 1031 deferral. With professional advice and patience, you can satisfy the IRS requirements and still transition your investment into a personal asset when the time is right.