In a 1031 exchange the replacement property must be “like kind” to the relinquished property. In general, any real estate held for “investment” purposess is considered like kind. The variations in type of property, quality, age, etc. isn’t a factor. For example you can exchange a multi family rental property for a larger apartment building or rental condo in a better location.
Properties must be “like kind”
Like-kind refers to the nature of the investment rather than the form. Any type of investment property can be exchanged for another type of investment property. A primary residence does not qualify as it is not a business or business investment
From the IRS website:
Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home*, does not qualify for like-kind exchange treatment.
Both properties must be similar enough to qualify as “like-kind.” Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.
*there are some exceptions for a vacation home qualifying
All proceeds must be reinvested
To avoid paying any capital gains taxes you must reinvest all of the proceeds from the sale of your investment property. The value of the replacement property must be qual to or greater than the value of the sold property.
Titles must be identical
The way you take title for the replacement property must be the same as the way title was taken for the sold property.
The above information is based on items from the IRS website and may be subject to change at any time. The information is for general knowledge only and we advise to check with the IRS website or your accountant for updated information.