What is a Section 1031 Tax Deferred Exchange?
Answers for Buyers

Tax deferred exchanging is an investment strategy that should be considered by anyone who owns investment real estate. 

A tax deferred exchange is simply a method by which a property owner trades one property for another without having to pay any federal income taxes on the transaction.  In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property.  But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.

These exchanges are sometimes called "tax free exchanges," because the exchange transaction itself is not taxed.

Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code.  The requirements of Section 1031 and other sections must be carefully met, but when an exchange is done properly, the tax on the transaction may be deferred.

In an exchange, a property owner simply disposes of one property and acquires another property.  The transaction must be structured in such a way that it is in fact an exchange of one property for another, rather than a taxable sale of one property and the purchase of another.

Today, a sale and a reinvestment in a replacement property are converted into an exchange by means of an exchange agreement and the services of a qualified intermediary - a fourth party who helps to ensure that the exchange is structured properly.

The IRS''s regulations make exchanging easy, inexpensive, and safe.