Like-Kind or Not? Unique Property Interests in 1031 Exchanges

In a Section 1031 tax-deferred exchange, only real property qualifies for tax-deferral treatment – and under the like-kind exchange real estate rules, the property you acquire must be of “like kind” to what you sold. This makes proper classification of real estate interests crucial.  

Generally speaking, any asset class is exchangeable for any other asset class – such as industrial to residential, or commercial to multifamily. The challenge is that real property can be owned in many different ways, and certain assets that look and feel like real estate might legally be considered personal property. Some assets must be transferred together with specific underlying rights (like a long-term lease or perpetual easement) to be considered real property.  

Note that while personal property rights cannot be exchanged, they are different from a real estate interest that does not qualify for exchange (such as personal use properties like primary residences, and inventory properties like flips and new construction – these properties are excluded from exchange treatment by virtue of their use, not the type of interest being transferred).  

Below we explore several unique property interests that often cause confusion, and how to determine if they can be treated as like-kind real estate in a 1031 exchange. 

Airplane Hangars 

Airplane hangars present a common gray area. Many hangars (especially at airports) are transferred by a license (essentially a permission to occupy space), which is a personal property right and not exchangeable.. In contrast, a hangar can qualify as real property if it’s affixed to the ground and conveyed together with a transferable land interest like a long-term ground lease or a perpetual easement. In other words, the existence of the hangar itself is not necessarily determinative of whether it’s exchangeable – the underlying real estate rights that come with it are. 

When evaluating a hangar deal, it’s helpful to determine what legal instrument conveys the hangar. Is the seller assigning you a license, are they assigning or subleasing a ground lease for the land, or granting an easement? You’ll want to confirm that any lease or easement has a term long enough to be considered like-kind real property (typically, a leasehold of 30 years or more, or a perpetual easement, can qualify as like-kind to a fee interest). If the airport or city must consent to the transfer, factor in that process as well. The key fact to remember is that a standalone hangar license (with no accompanying land interest) will not qualify. Always clarify the nature of the acquisition rights before committing to the purchase. 

Common Question:

Is a hangar bill of sale by itself enough to do a 1031 exchange? – Usually not. A bill of sale alone likely means you’re only getting the structure or a use permit for it. You should look for an accompanying lease or easement that conveys real property rights with the hangar which may render the acquisition like-kind to what you sold. 

Cell Towers and 1031 Exchanges 

1031 exchange cell tower transactions can also be tricky. A cellular tower (the physical structure) is typically considered an improvement to real property, which by itself is classified as real estate. However, an improvement alone is not like-kind to a fee simple interest unless it comes with a transferable property right to the land it sits on. In practical terms, this means that if you’re acquiring a cell tower, you need to be acquiring either a recorded easement for the tower site or an assignable ground lease for that land in order for it to count as like-kind real property in a 1031 exchange. The exact bundle of rights being transferred is critical. 

Start by confirming what you are actually buying in a cell tower deal. Is it a perpetual easement that covers the tower’s footprint (and perhaps access roads)? Is it a leasehold interest (as a tenant) in the ground with a 30-year+ term remaining? Or are you only buying the tower equipment and a contract for revenue? The first two scenarios (easement or leasehold) can qualify as real property interests, whereas merely buying equipment or a revenue stream without land rights will not qualify (those would be personal property or contract rights).  

Check the duration and terms of any property right: if it’s a lease, ensure it’s long-term (remember the 30-year rule for like-kind leaseholds). If it’s an easement, confirm it’s recorded and effectively perpetual. Also, determine which side of a lease is being transferred – the lessee’s interest (the tenant’s rights to use the land) can be like-kind to real estate, but a landlord’s right to receive rent via a tower lease, without transfer of the underlying fee interest, is personal property and is not exchangeable. In fact, selling a bare rent stream from a tower (without transferring real property rights) would not qualify for 1031 treatment, even though it’s related to the underlying real estate. 

Common Questions:  

Can I exchange a cell tower for an office building? – Potentially, yes. But only if your tower disposition includes a real property interest like a recorded easement or a long-term ground lease; otherwise, you’d be trading personal property for real estate.  

Is a revenue-sharing agreement with a tower company like-kind to real property? – No. If all you’re buying is a contract right to income and not any interest in land, that’s considered personal property 

Mobile Home Parks in a 1031 Commercial Exchange 

Mobile home parks combine traditional real estate with potential personal property, so you need to parse what’s being sold. The land itself and any permanent infrastructure (roads, utility hookups, concrete pads, etc.) are real property and generally qualify for a 1031 commercial exchange for mobile home parks. In many parks, the residents own their mobile homes and rent the pads, which means when you buy the park you’re mainly acquiring land and utilities – most of which are real property interests. However, sometimes a park sale includes mobile homes that the park owner owns (homes used as rentals or that convey with the sale). A mobile or manufactured home that is not permanently affixed to the land (for example, not on a permanent foundation and still classified as a vehicle) is generally considered personal property, not real property. If such homes are part of the deal, their value may not qualify for 1031 deferral.  

To properly incorporate only the real estate portion of the sale or acquisition in your 1031 exchange, you may need a purchase price allocation distinguishing the value of land and improvements versus the value of any unattached mobile homes or other personal property. It’s wise to make an inventory of any park-owned mobile homes included in the sale. Check whether each home has been converted to real property (many states have procedures to convert a mobile home to real estate if it’s permanently installed). If a home is still titled as a vehicle or not affixed, then it remains personal property and should be valued separately.  

Exchange funds from the sale of the real estate portion may be included in an exchange – on the purchase side, exchange funds may be used to purchase the real estate portion of a mobile home purchase.  

Common Questions:  

Can exchange funds be used to purchase personal property elements of a mobile home park acquisition? Generally, no – exchange proceeds must be used on like-kind (i.e. real estate) property only. However, if at least 85% of the purchase consists of land and infrastructure (or other real property rights), exchange funds can cover any “incidental” personal property, and this will not cause constructive receipt. However, the funds expended on the personal property portion of the purchase would be taxable boot.  

Do park-owned mobile homes count as real property in the exchange? – Only if each home is permanently affixed and legally classified as real property. Any park-owned home that is not affixed (still on wheels or still titled as personal property) is treated as personal property and not like-kind to real estate. You would need to allocate value to those homes separately and that portion would be taxable. 

Water Rights and 1031 Exchange Considerations 

Real estate involving water – such as waterfront land, marinas, docks, and rights to use water – introduces its own complexities. Water rights and 1031 exchange eligibility depend on how those rights are defined under state law. Generally, land under or adjacent to water (like a marina lot or a dockside parcel) is real property, and structures like docks are considered improvements (real property) attached to that land. There are also riparian or littoral rights – the rights of a landowner to access and use adjacent water – which are often considered real property interests, provided they are perpetual rights tied to the land. For instance, the right that comes with owning a riverfront property to make reasonable use of the water is usually a real property right that runs with the land (and thus like-kind to other real estate, if it’s part of what you’re buying or selling). 

Some states treat certain water rights as real property if they are permanent or attached to land ownership, while treating shorter-term or usage-limited rights as personal property or mere licenses. When analyzing a waterfront property or water rights in a 1031 exchange, look closely at what exactly is being conveyed in your deed or contract. Does the deed include ownership of underwater land or a section of a marina? Does it explicitly grant appurtenant water rights? Are there any easements for dock use or boat slips included? And importantly, are the water access rights perpetual or time-limited? 

If the right to use the water or dock is coming from a permit or license (for example, a revocable permit from a government entity to maintain a dock or to use a certain amount of water), be cautious. A revocable or term-limited permit often points to a personal property right, not a true real property interest For 1031 purposes, the duration and security of the right are what drive eligibility: a right that is indefinite and tied to the land is more likely to be like-kind to fee simple real estate, whereas a short-term or conditional permission is not. Always verify if any special approvals are needed to transfer these rights – for example, some states require consent to transfer water allotments or marina slip rights. That can affect whether the right is considered part of the real estate you’re buying or just a contractual privilege. 

Common Questions:  

Are individual boat slips real property that can be 1031 exchanged? – Often yes, if you own a deeded slip or an interest via a recorded easement or condominium share in a marina. In that case, it’s an interest in real estate.  

Is a revocable dock or water permit like-kind to fee land? – Typically no. If the right to use the water or dock can be revoked or expires after a short term, it’s usually treated as personal property (a use license), not as a like-kind real property interest. The key is whether the water rights are permanent and attached to property ownership – if so, they can qualify as real property for 1031 purposes. 

1031 Exchange with Mineral Rights and Natural Resource Interests 

Interests in natural resources — for example mineral estates, leases, royalties and production payments — are treated for 1031 purposes according to their legal nature and economic attributes. Under state property law, unsevered natural products and perpetual ownership interests in the land are generally real property; for federal tax purposes the IRS and courts will also examine the substance of the interest (especially the rights conveyed and the duration). Thus, mineral rights can qualify for a 1031 exchange if they are a perpetual fee or a long-term lease (for example a lease that runs for a very long remaining term or ‘for so long as production continues’) and perpetual nonparticipating royalty interests are frequently treated as like-kind to other real property.  

By contrast, short-term mining or extraction leases, production payments and other limited-duration carved-out payment streams are commonly characterized as personal property or contractual rights and typically do not qualify for 1031 treatment. Once resources are severed, the extracted products are personal property (inventory), so a sale of oil, gas, timber or mined ore is not a 1031 exchangeable asset. Because outcomes depend on state law, the precise conveyance language, the remaining term and the economic substance of the interest, careful drafting and consultation with a tax advisor experienced in natural-resource transactions is essential. 

Air Rights in a 1031 Exchange and Development Opportunities 

In some locales (especially dense urban areas), air rights or transferable development rights (TDRs) become valuable assets. These are essentially rights to use or build in the space above a property, or the right to develop property to a certain density or height, which can sometimes be sold separately from the land. Air rights 1031 exchanges exist because under the current IRS regulations, many intangible interests in real estate – including perpetual easements, options to acquire real property, and development rights – are explicitly treated as real property for 1031 purposes. This means if you sell an apartment building, you could potentially buy air rights as your replacement property (or vice versa) and have a like-kind exchange, as long as those rights are properly characterized as real estate interests. 

A deeded or recorded perpetual air easement or a properly deeded transfer of development rights typically will support 1031 treatment, whereas short-term, revocable licenses, temporary permits or purely contractual rights (for example a short, nontransferable construction license) generally will not. Because local law, municipal TDR schemes and the conveyance language drive characterization, careful documentation and advice from tax and property counsel experienced in urban development transactions are essential. 

Conclusion: Verify and Consult on Unique Assets 

When it comes to unique property interests in a 1031 exchange, details matter. Always verify what exactly you are selling or buying – the nature of the interest, how it’s documented, and how long the interest lasts. Many unconventional assets (from cell tower leases to mineral rights) can qualify as 1031 exchange like-kind property if structured correctly, but a slight difference in how a right is held can mean the difference between a valid exchange and a taxable sale.  

Understanding the 1031 exchange like-kind property definition — including the perpetual easement definition and the real estate interests that do not qualify for exchange — is key to ensuring compliance with like-kind exchange real estate rules. 

In all cases, it’s wise to consult with a tax or legal advisor about your specific situation Given the nuances (state law variations, IRS definitions, and the like-kind timing rules), professional guidance will help ensure you don’t assume something is exchangeable when it isn’t.