Many owners assume a 1031 exchange means trading a rental house for another rental house. It does not have to. Investment real estate can generally be exchanged for other investment real estate. A rental home in Elk Grove can, in general, be exchanged into a retail building, a medical office, or an industrial property.
The question is whether the new property fits your life and risk tolerance better than the old one.
Common Commercial Destinations
Single-tenant net lease (NNN) retail
A building leased to one tenant, often a chain or service business. Under many net leases, the tenant pays some or all of the property taxes, insurance, and maintenance. The exact split depends on the lease.
Medical office
Space leased to doctors, dentists, clinics, or similar providers. Tenants often invest in build-out, which can encourage longer stays. Specialized improvements can also make re-leasing harder if a tenant leaves.
Industrial
Warehouses, flex space, and small manufacturing buildings. These often have simpler finishes than office or retail. Demand depends on the local economy and the building's location, size, and access.
Delaware statutory trusts (DSTs)
Some owners exchange into a fractional interest in a property held by a Delaware statutory trust. The IRS has ruled that, when certain conditions are met, an interest in a DST can be treated as an interest in the underlying real property for 1031 purposes. DSTs are a separate product with their own structure, fees, and limits. Discuss them with your CPA or tax attorney and your financial advisors. This site does not recommend for or against them.
The Tradeoffs to Weigh
Moving from residential to commercial changes the kind of risk you carry. It does not remove risk.
Tenant credit
With a house, you rely on one household. With a single-tenant commercial building, you rely on one business. Ask: - Who is actually signing and guaranteeing the lease? A local operator, a franchisee, or a corporate parent? - How strong are their financials? - What happens if they close this location?
Lease term
Commercial leases often run for years, with set rent increases. That can mean steady, predictable income. It also means a below-market lease can lock in low rent for a long time. Look at: - Years remaining on the lease - Renewal options and who controls them - Rent increases built into the lease
Landlord responsibilities
"NNN" does not mean "nothing." Even under a net lease, the landlord may remain responsible for the roof, structure, parking lot, or major systems. Read the actual lease. Some leases put almost everything on the tenant. Others leave large items with the owner.
Vacancy risk
A vacant rental house can usually be re-leased in weeks. A vacant single-tenant commercial building can sit for months or longer, and the next tenant may need costly improvements. You go from frequent small turnovers to rare but larger ones. Plan reserves with that in mind.
Concentration
Selling one rental to buy one building concentrates your risk in one tenant and one location. Some owners split proceeds across more than one replacement property. The identification rules limit how you do this, so talk with your QI early.
Questions to Ask Before You Exchange Into Commercial
- What do I want to stop doing? Calls, repairs, tenant screening?
- How much income stability do I need, and how much vacancy can I survive?
- How long do I plan to hold?
- Do I understand exactly what the lease makes me responsible for?
- Can I meet the 45-day identification and 180-day closing deadlines on this kind of property?
- Will I carry enough value and debt to avoid boot?
- Is the replacement property outside California? If so, plan for FTB Form 3840 each year.
The Bottom Line
Exchanging from residential into commercial is common and generally allowed under the like-kind rules. The value of the move depends on the tenant, the lease, and what you as an owner are trying to stop doing. Do the homework on the tenant and the lease before the 45-day clock starts.
Common questions
Can I do a 1031 exchange from a rental house into commercial property?
Generally yes. Real property held for business or investment can be exchanged for other like-kind real property held the same way, and investment real estate is generally like kind to other investment real estate.
What is a NNN property?
A property on a net lease, where the tenant pays some or all of the property taxes, insurance, and maintenance in addition to rent. What the tenant covers depends on the lease.
Does a NNN lease mean the landlord has no responsibilities?
Not always. Many net leases still leave the roof, structure, or other major items with the landlord. Read the lease to see the actual split.
Can I exchange into a Delaware statutory trust?
The IRS has ruled that a DST interest can be treated as an interest in real property for 1031 purposes when certain conditions are met. DSTs are a separate product to review with your CPA or tax attorney and your advisors.
What are the biggest risks of moving into commercial property?
Dependence on one tenant's credit, longer and costlier vacancies, lease terms that may lock in rent, and landlord duties that vary by lease.
Sources
- 26 U.S. Code § 1031, Exchange of real property held for productive use or investment.
- 26 CFR § 1.1031(k)-1, Treatment of deferred exchanges.
- IRS Publication 544, Sales and Other Dispositions of Assets (Like-Kind Exchanges).
- California Franchise Tax Board, 2025 Form FTB 3840 Instructions, California Like-Kind Exchanges.
- Internal Revenue Bulletin 2004-33, Rev. Rul. 2004-86 (Delaware statutory trusts).
Last reviewed October 2026.