In a 1031 exchange, the property exchanged must be which of the following?

• A. Real estate used for personal residence
• B. Like-kind property
• C. Only equipment qualifies
• D. Inventory property

Answer: (B)

The key idea is that a 1031 exchange requires like-kind property. In this context, the property you swap must be real estate held for productive use in trade or business or for investment, and it must be real property exchanged for real property of the same nature or character. That’s why real estate held for investment or business can be swapped for other like-kind real estate, deferring taxes. Personal residences, inventory, or equipment don’t meet this requirement, so they wouldn’t qualify for the deferral under standard 1031 rules.