The expression 1031 exchange refers to an Internal Revenue Code section numbered 1031.

In summary, this law say that if investment property is exchanged for like kind investment property then capital gains tax will not have to be paid in the year of the Exchange.

Like kind has been broadly defined by the IRS to include ANY kind of investment property for ANY other kind of investment property.

You have an investment property, an apartment building. 
You can exchange for a warehouse, farm, development land, office building, mobile home park, etc. as long as the property you are exchanging into is for investment purposes.

Exchanging is a very special investment tool because very few other investments have this flexibility.

Exchanging allows a real estate broker or agent to meet the client's needs to change their thinking of using real estate to invest with.

The client may want an investment that is easier to manage, provide more cash flow, or has land they would like to develop. 

Using the IRS code 1031 allows a broker to meet the changing needs or wants of their client, without having to be concerned about the tax liability.

Exchanging is a great tool for the broker and the investor.

The IRS code 1031 says, if no tax liability is to be incurred, the exchangor must trade equal or greater both equity and fair market value.

This means all cash received from the relinquished property must be used as down payment on the replacement property, and the replacement property must be equal or larger in fair market value to the relinquished property.  

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1031 Exchange - General Questions


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