Like-kind is one of the most misunderstood terms in the 1031 exchange process, largely because it sounds like it should mean similar in type, such as trading an apartment building for another apartment building. In practice, the rule is far broader than that for real estate, and understanding what it actually covers opens up far more flexibility for Michigan investors than the name suggests.
Why Almost Any Investment Real Estate Qualifies
Since the 2017 tax law changes, Section 1031 applies only to real property, but within real property the definition of like-kind is broad by design. Nearly any type of real estate held for investment or business use qualifies as like-kind to nearly any other, regardless of grade, quality, or use. A Michigan investor can sell a vacant industrial parcel outside Lansing and exchange into a multifamily building in Ann Arbor, or sell farmland near Adrian and exchange into a retail strip center in Warren, because both sides of the trade are real property held for investment purposes. The like-kind standard is about the nature of the asset as real property, not its physical similarity to what was sold.
The Real Test: Held for Investment or Productive Use
The requirement that actually limits eligibility is not similarity between properties, it is how both the relinquished and replacement property are held. Both sides of the exchange must be held for investment or used productively in a trade or business, not held primarily for personal use or as inventory for resale. This is why a personal vacation cabin generally does not qualify unless it has genuinely been used as a rental investment, and why a property flipper's inventory of houses purchased specifically to renovate and resell quickly is typically excluded, since that property is held for sale rather than investment.
What Commonly Qualifies Across Michigan Portfolios
Investors across Michigan regularly exchange between very different property types under the like-kind umbrella, including:
- multifamily apartment buildings and single-tenant net-lease retail
- industrial and warehouse space and medical office buildings
- raw land held for investment and improved commercial property
- a fractional interest in a Delaware Statutory Trust holding institutional-grade real estate
What Does Not Qualify as Like-Kind
A handful of categories fall outside the like-kind rule even though investors sometimes assume otherwise. A primary residence does not qualify, since it is not held for investment or business use, though a separate exclusion under a different tax code section can shelter gain on a primary home sale. Property located outside the United States does not qualify as like-kind to property inside the United States, so a Michigan investor cannot exchange a domestic rental into foreign real estate under Section 1031. Personal property, such as equipment, vehicles, or the movable fixtures sometimes included in a business sale, no longer qualifies for like-kind treatment at all following the 2017 changes, which limited the entire section to real property only.
How This Plays Out in a Real Michigan Transaction
A typical example involves an investor selling an aging strip mall in Grand Rapids that has become management-intensive, exchanging into a newer industrial building near a distribution corridor in Southeast Michigan instead. The two properties look nothing alike in use, tenant type, or physical form, but both are investment real property, so the exchange satisfies like-kind without difficulty. The more common source of trouble is not the property type itself but making sure any personal property bundled into either transaction, such as furniture, fixtures, or equipment included in a sale price, is separated out and priced correctly so it does not inadvertently create boot in an otherwise straightforward exchange.
Mixing Property Types Inside a Single Identification
Because the like-kind standard is so broad for real estate, an investor is not locked into replacing one property with a single similar asset. A Michigan owner selling one larger holding, such as a self-storage facility near Traverse City, can identify a mix of replacement candidates under the 200 percent rule, spreading proceeds across a small medical office building, a portion of a Delaware Statutory Trust, and a net-lease retail property, so long as each piece qualifies as investment real property. This flexibility is part of what makes 1031 exchanges useful for portfolio restructuring rather than a simple swap of one asset for a near-identical replacement, letting an investor diversify by property type, tenant profile, or geography across Michigan or beyond while still deferring gain on the original sale.
Common 1031 Exchange Questions
Does like-kind mean I have to exchange into the same type of property I sold?
No. Like-kind for real estate is broad, covering nearly any investment or business real property regardless of type, so an industrial building can be exchanged for an apartment complex or retail center.
Can I use a 1031 exchange to sell Michigan property and buy real estate in another state?
Yes, like-kind treatment applies across state lines within the United States, so a Michigan property can be exchanged for real estate located anywhere else in the country, though not outside the United States.
Does my primary residence qualify for a 1031 exchange?
Generally no, since a primary residence is not held for investment or business use, though a separate tax code exclusion can shelter gain on the sale of a primary home in other ways.
Can I exchange farmland for a commercial building?
Yes, both are investment real property, and the like-kind standard does not require similarity in use, only that both properties are held for investment or business purposes.
Does personal property included in a sale, like equipment or furniture, qualify for exchange treatment?
No. Personal property no longer qualifies for like-kind exchange treatment under current law, which limits Section 1031 to real property only, so bundled personal property needs to be priced and handled separately.
