Overview
Almost every investment property that you buy or sell comes with more than just the real estate.
A rent house has a stove and a refrigerator. A Duplex has window units and a water heater sitting on the floor. An apartment building has laundry equipment, office furniture, and chairs around the pool. A motel comes fully furnished.
All of that is personal property. The IRS calls it Section 1245 property. In the business we call it FF&E, for furniture, fixtures, and equipment. You need to know exactly what happens to that personal property in a Section 1031 like-kind exchange, because the answer changed in 2018, and most of what you will read online is still wrong.
Real Property Only
Before 2018, you could include your furniture, furnishings, fixtures, and equipment, the personal property, in the Section 1031 Exchange, and defer the capital gains tax on it, if there was any, the same as you were deferring the capital gains tax on the actual real estate involved in the 1031 Exchange.
That is over.
The Tax Cuts and Jobs Act amended Section 1031 to apply to real property only, for exchanges after December 31, 2017. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, left that change in place and made it permanent.
As of 2026, Section 1031 defers tax on the real property part of the transaction, but not on any other part.
Section 1031(a)(1) now reads that no gain or loss is recognized on the exchange of “real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind.”
The word that matters is “real.”
Your furniture, your appliances, your equipment — none of it is real property. It is what the IRS calls personal property. So none of it rides into the exchange.
When you sell, the slice of the price that belongs to the personal property is a separate, taxable sale. When you buy, the personal property you pick up is a separate purchase.
The real estate goes through the Section 1031 Exchange.
The personal property does not.
The 15% Rule That Fools People
You will hear that a “15% rule” lets you keep personal property inside your exchange.
There is a 15% rule. But it does not do that.
The Treasury Regulations say that personal property which is “incidental” to the real property you are buying — the kind of thing normally transferred with it — does not have to be separately identified inside your 45 days, and does not break your Qualified Intermediary safe harbor, as long as its value is 15% or less of the value of the replacement real property (the Replacement Property, not the property you are selling).
That is a paperwork convenience. It is not a deferral.
The same Regulations say plainly that the incidental personal property is still taxable in a 1031 Exchange. It is boot. The 15% rule keeps a little furniture from wrecking your exchange. It does not make the furniture tax-free.
And notice what the 15% is measured against: the replacement real property you are buying, not the price of the property you are selling. It is a rule about what comes in, not what goes out.
So put the 15% rule out of your head as a way to shelter furniture. It cannot do it.
Split the Deal
Here is how you actually handle personal property. You split the transaction in two.
When the Taxpayer sells his Duplex, he does not sell everything for one number. He allocates the price. He assigns a value to the real property — the land, the building, the garages — and a separate value to the furniture and furnishings. The real property goes into the Section 1031 Exchange and the tax is deferred. The furniture is sold, and the tax on it is due now.
You set this allocation in the purchase and sale contract, and it shows up on the Settlement Statement at closing. The buyer and the seller have opposite interests here.
The buyer wants more value assigned to the furniture, so he can write it off fast. You, the seller, want more value on the real property, so more of your gain is deferred and less is exposed to recapture. It is a negotiated number, and you want it in writing.
The Tax on the Furniture
The tax on the furniture is Depreciation Recapture tax, and on Section 1245 property it is taxed as ordinary income, to the extent of the depreciation you took.
Assume that the Taxpayer just sold his Relinquished Property, and the real estate is handled under Section 1031, but not the personal property.
The Taxpayer is accounting for that separately.
He bought his $20,000 of furniture and furnishings last year and took 100% Bonus Depreciation on all of it. He wrote off the entire $20,000, so his adjusted basis is zero.
With a zero basis, there is nothing left to subtract. Every dollar the furniture sells for is gain, and because all of it traces to the depreciation he claimed, all of it is recapture — ordinary income.
And here is the catch with recent furniture: it is barely a year old. It is not worn out, and you cannot pretend it is. Its honest value is close to what he paid. If the contract allocates $16,000 to it — a fair number for nearly-new furnishings — then the Taxpayer has $16,000 of recapture, taxed as ordinary income.
He cannot lowball it to escape the tax; assign $4,000 to furniture you bought last year for $20,000, and the IRS will throw it out.
So the recapture is real, and it is not small. The question is not how to make it vanish at the closing table. The question is how to offset it.
The Offset on the Buying Side
Here is where the recapture gets neutralized.
Your Replacement Property almost certainly includes its own furniture, and you can take 100% Bonus Depreciation on it — and it does not have to be new.
For years Bonus Depreciation was only for new property, and that is what trips people up. That changed. Since the Tax Cuts and Jobs Act, made permanent by OBBBA, Bonus Depreciation applies to used property too, as long as three things are true: the furniture is new to you, meaning you did not own or use it before; you bought it from someone who is not a related party; and your basis in it is your cost — what you paid — not a basis handed down from the seller or inherited from someone who died.
The used furniture that conveys with your Replacement Property meets all three. You did not use it before. You bought it from an unrelated seller. Your basis is the value you allocate to it in the contract.
So you claim Bonus Depreciation on it.
Now the numbers.
The Taxpayer’s Fourplex comes furnished, and he allocates $16,000 to that furniture. He takes 100% Bonus Depreciation on the $16,000. That deduction is ordinary. The $16,000 of Depreciation Recapture on his old furniture is ordinary. They land in the same place on the return and cancel. The furniture washes, and he never bought a new chair.
There is one timing point on that wash. It nets cleanly only when the recapture and the bonus deduction fall in the same tax year. In a Delayed 1031 Exchange that closes the sale late in one year and the replacement early the next, the recapture lands on the first year’s return and the bonus deduction on the second. You front the tax and recover it a year later. It still washes across the two years — just not on a single return.
Plan for the gap.
One More Layer: Passive Losses
There is a wrinkle for the investor who is not active in the business, and you should know about it.
Rental real estate is passive by definition under Section 469, unless you are a real estate professional. Passive deductions can normally only offset passive income; the rest is suspended and carried forward.
In a clean swap — the furniture on the way in is worth about what you recaptured on the way out — this never comes up. The recapture on your old furniture is passive income.
The Bonus Depreciation on the replacement furniture is a passive deduction. They are both passive, they meet in the same bucket, and they cancel. Nothing is left over, and nothing is suspended.
It only matters if you put more furniture on the replacement side than you recaptured on the old — you furnish the new property more richly, or add equipment. Then the bonus deduction is larger than the recapture, and the excess is a passive loss.
Unless you are a real estate professional, or you actively participate and your income is under the limit, that excess is suspended and carried forward. It does not shelter your wages this year. It is not lost. It waits.
And one trap that belongs to doing this inside an exchange: a Section 1031 Exchange is not a fully taxable sale, so it does not release the suspended passive losses you have piled up on the Relinquished Property over the years. They are not freed. They travel with the deal and attach to the Replacement Property.
How You Report It
The split shows up on your tax return the same way it showed up at closing.
The real property exchange goes on Form 8824. The furniture sale goes on Form 4797, where the Section 1245 recapture is reported as ordinary income. If your property is a group of assets that amounts to a trade or business, you and the buyer each file Form 8594 to report how you allocated the price, and the two of you must report it the same way.
Conclusion
Personal property used to be part of the exchange.
Since 2018, it is not.
So you stop treating it as part of the exchange. You split the deal, you assign an honest value to the furniture, you recognize the recapture that comes with a zero basis, and you erase it with first-year Bonus Depreciation on the furniture that comes with the Replacement Property. The building defers. The furniture washes.
That is why the examples in the other articles on other types of exchange show you the split but follow only the real-property side. The furniture is handled here.
Now you know how.