A Section 1031 exchange (or “tax deferred exchange”) is a method by which one may sell a "qualified" parcel of investment property and then acquire another qualified parcel of investment property within a specific time period. If done properly, this type of transaction would allow the owner to qualify for a deferred gain treatment ... in other words, any gains realized during a normal sale of investment property (without using the methods contained within Section 1031) would be subject to taxation with the IRS, while 1031 exchanges are not. For example, when purchasing a replacement property after selling an investment property (without the benefit of a 1031 exchange), your buying power is reduced to the point that it only represents 70-80% of what it did before the exchange due to the payment of taxes. With a 1031 exchange, you maintain your buying power because the taxes one might owe on the sale are deferred to some point in the future. It should be emphasized that 1031 exchanges is a method by which a property owner can defer the payment of taxes, and not avoid the payment of taxes altogether, so taxes will eventually have to be paid at some point in the future.
As a 1031 exchange is a highly technical and regulated approach to capital gain tax deferral, it is essential to deal with people who understand the transactional elements involved to make sure the deal is done properly. Feel free to call us should you like to discuss the elements of 1031 exchanges at greater length.