Since January 1, 2018, the Tax Cuts and Jobs Act has drawn a hard line inside every real estate transaction: the building exchanges, the contents don’t. The furniture, fixtures, appliances, and equipment — what real estate professionals call FF&E — sit on the taxable side of that line, full stop.
What the Law Changed
Before 2018, personal property rode along with the real estate in a Section 1031 exchange without distinction. The beds, the refrigerators, the window units, the washers and dryers — all of it deferred right alongside the building. The Tax Cuts and Jobs Act ended that treatment. Section 1031 now applies to real property only, and the personal property involved in the deal is no longer part of the exchange. Whatever tax is owed on the sale of that FF&E is owed now, not later.
The Mechanics: One Closing, Two Transactions
The split happens at both ends of the exchange. When you sell your relinquished property, the portion of the sales price attributable to the FF&E is treated as a separate sale from the sale of the real estate itself. When you buy your replacement property, the FF&E inside that building is likewise a separate purchase — outside the exchange, outside the deferral.
In practical terms, every deal with furnished units requires an allocation of the sales price and the purchase price between the real estate and the personal property. That allocation isn’t optional or cosmetic; it determines what portion of your transaction the exchange actually protects.
Why Almost Every Deal Is Affected
It’s tempting to think this only applies to furnished vacation rentals or short-term units. It isn’t that narrow. Almost every property you will ever exchange has some furniture, fixtures, or equipment in it — a duplex with appliances, an apartment building with window units and washers and dryers, a commercial space with built-in equipment.
The FF&E on the Buy Side
The replacement property comes with its own FF&E, and that purchase is treated as a separate transaction as well. The exchange proceeds cover the real estate; the personal property inside the building you’re buying is handled independently. Getting the allocations right on both the relinquished and replacement sides is essential to understanding what you actually deferred — and what you didn’t.
What Can Be Done About the Tax on FF&E
There is room to work here. The tax on the personal property portion isn’t necessarily a large bill. If you end up owing taxes on the sale of the personal property in your relinquished property, there are methods to reduce it — potentially to little or nothing. The specifics of how that works are an accounting and tax matter, but the key point is that the liability isn’t simply accepted as fixed. Proper allocation and planning on the FF&E side can make a material difference in what you actually owe.
The Core Discipline the TCJA Imposed
The practical discipline the Tax Cuts and Jobs Act imposed is this: you can no longer treat a furnished rental as a single asset for exchange purposes. Every Exchangor — whether an individual, an LLC, a partnership, or a corporation — now carries two sets of books through a transaction. The real estate moves through the exchange. The FF&E moves through a separate accounting. Conflating the two, or ignoring the FF&E side entirely, leaves you exposed to a tax bill you thought you had deferred.
Know what’s inside the building before you close. Allocate it. Account for it separately. The exchange protects the real property; everything else is your responsibility to handle on its own terms.