Short answer: Yes. Any US real estate held for investment or business is like-kind to any other, so you can exchange commercial property such as a retail or office building into residential rentals, and the reverse. The residential property must be held as a rental or investment, not as a home you or your family live in.
Reviewed by Jon Hilley. Last updated September 29, 2026.
Yes. Under the 1031 exchange rules, all US real estate held for investment or business use is like-kind to all other US real estate held the same way. A retail building, office, warehouse or other commercial real estate can be exchanged for a residential rental such as a single-family rental, a duplex or an apartment building, and the reverse works too.
What matters is how you hold the property, not what type it is. The residential replacement has to be held as a rental or other investment. If you plan to move in, it isn't investment property and the 1031 exchange can fail.
Key rules
- Like-kind is broad for real estate: any US real property held for investment or business is like-kind to any other, so commercial for residential qualifies (Treas. Reg. §1.1031(a)-1(b)).
- Both properties must be held for investment or business: the commercial property you sell and the residential property you buy (IRC §1031(a)(1)).
- No personal residences or flips: a home you live in and property held primarily for sale don't qualify (IRC §1031(a)(1)-(2)).
- US for US only: US real property and foreign real property are not like-kind (IRC §1031(h)).
- Same deadlines: identify within 45 days and close within 180 days of the sale (IRC §1031(a)(3)).
What counts as residential investment property?
Residential rentals of any size qualify: a single-family home rented to a tenant, a condo, a small multifamily building or a large apartment complex. A DST interest holding apartments can also qualify as a replacement, since a properly structured DST interest is treated as real property for 1031 purposes (Rev. Rul. 2004-86).
A vacation home is harder. It qualifies only if it is genuinely held for investment, and the Rev. Proc. 2008-16 safe harbor (rented at fair rent for at least 14 days a year with limited personal use) is the safest path.
Mixed-use buildings
A building with retail on the ground floor and apartments above is real property held for investment, so it works as either the property you sell or the one you buy. If you live in one of the units, that part is your residence, not investment property, and the price has to be split between the two uses. Rev. Proc. 2005-14 explains how the home sale exclusion and a 1031 exchange can apply to the same property.
What changes when you go from commercial to residential?
Depreciation schedule
Commercial buildings are depreciated over 39 years and residential rentals over 27.5 years. In an exchange, the carried-over basis generally keeps depreciating on the old property's schedule, and only the extra basis you add is treated as new property. There are special rules when the recovery periods differ, so have your CPA set up the depreciation on the replacement (Treas. Reg. §1.168(i)-6).
Management and financing
Going from a single net-leased commercial tenant to many residential tenants usually means more hands-on management. Residential lending terms are also different, and you need enough new debt or added cash to replace any mortgage paid off on the commercial sale, or the debt relief is taxable as boot.
Moving into the residential property later
Some investors plan to retire into the house they exchange into. That can work only if you genuinely hold it as a rental first. Even then, you can't use the home sale exclusion until you have owned it 5 years from the exchange (IRC §121(d)(10)), and gain allocated to the rental years generally stays taxable. See what the 2-year rule for a 1031 exchange means.
Example: retail building into an apartment building
- Sale price of retail building: $1,500,000
- Selling costs: $75,000
- Amount realized: $1,425,000
- Adjusted basis ($1,000,000 cost minus $300,000 depreciation): $700,000
- Realized gain: $725,000
- Mortgage paid off at sale: $500,000
- Net equity reinvested: $925,000
- Apartment building purchase price: $1,600,000
- New loan: $675,000
- Recognized gain: $0
The replacement costs more than the $1,425,000 amount realized, all $925,000 of equity goes into it, and the $675,000 new loan more than replaces the $500,000 paid off, so the full $725,000 gain is deferred. Assuming the 25% maximum rate on the $300,000 depreciation portion ($75,000), a 20% capital gains rate on the other $425,000 ($85,000) and 3.8% net investment income tax on $725,000 ($27,550), that is $187,550 of federal tax deferred; state tax is not included. The apartment building's basis is $875,000 ($1,600,000 minus $725,000 deferred gain).
To run your own numbers, try the 1031 exchange calculator.
Other questions investors ask
How do you avoid capital gains tax on a commercial property?
In most cases you defer it rather than avoid it. A 1031 exchange for commercial property into other investment real estate, commercial or residential, defers federal capital gains and depreciation recapture tax, and in most states the state tax too. Other options, such as an installment sale, spread the tax out; see what you can do instead of a 1031 exchange.
Common mistakes
- Buying a house to live in. We see investors sell a commercial property and buy a house a family member or they themselves will occupy. Personal use by you or relatives paying below-market rent undercuts investment intent.
- Underestimating the debt. Commercial loans paid off at sale are often larger than investors expect. If the residential purchase carries less debt and you don't add cash, the difference is taxable.
- Assuming the depreciation resets. Investors are often surprised the carried-over basis doesn't start a fresh 27.5-year schedule. Only the added basis does.
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