Hotels and hospitality properties present unique challenges in a 1031 exchange because they combine real property with significant personal property and business operations. Structuring a hotel exchange correctly requires careful separation of the real estate from the business value — and an experienced qualified intermediary who understands the distinction.
What Qualifies in a Hotel Exchange
Only the real property component of a hotel qualifies for a 1031 exchange. The business value, franchise agreements, and personal property (furniture, fixtures, equipment) do not qualify as like-kind real property. A proper hotel exchange requires an allocation between the real estate and non-qualifying components.
- Land and building (real property) — qualifies
- Furniture, fixtures, and equipment (FF&E) — does not qualify as real property
- Franchise agreements and brand value — does not qualify
- Working capital and accounts receivable — does not qualify
TCJA Impact: Personal Property No Longer Qualifies
Before the Tax Cuts and Jobs Act of 2017, personal property (including hotel FF&E) could be exchanged under Section 1031. The TCJA eliminated personal property exchanges effective January 1, 2018. Hotel investors must now allocate the sale price between real property and personal property, with only the real property portion eligible for exchange.
Exchanging Out of Hotels Into Other Asset Classes
Many hotel investors use 1031 exchanges to exit the hospitality sector and redeploy into less management-intensive assets like NNN retail, industrial, or multi-family. The like-kind requirement is broad: hotel real estate can be exchanged for any other investment real property. We can help you identify replacement properties and structure the exchange to maximize your deferral.
Replacement Property Options for Hotel Sellers
Hotel sellers have the full range of commercial real estate available as replacement property. Delaware Statutory Trusts (DSTs) are particularly popular for hotel investors who want to exit active management entirely. DSTs allow you to exchange into a passive fractional interest in institutional-quality commercial real estate.