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If a property owner or investor wants to exchange a property for another property and defer the capital gains tax, then they may want to make use of the IRC 1031 property exchange. Naturally, there are some specific conditions that must be met in order for the exchange to be approved by the Internal Revenue Service, such as the amount of time allowed to complete the transaction and the property must qualify as “like-kind.”

A 1031 like kind exchange is not really an avoidance of tax; it is more of a rollover of equity of like properties so that you can continue to build wealth through investing in real estate. Ever since 1921 there has been an exception in the Capital Gains tax code that states the tax can be deferred if the investment property is not sold but exchanged instead.

The basic idea of the IRC 1031 is for an investor to be able to sell their income or investment property without paying a large sum of capital gains taxes, by exchanging it for a like kind income or investment property. And while the section 1031 exchange rules have actually changed very little since 1921, there are some helpful tips that an investor or property owner should know.

This tax deferred 1031 exchange is much more than just selling an investment property, such as a rental house, and then turning around and buying another rental property. There are some very creative possibilities with this code. Perhaps you should consider purchasing a property in the area where your child is going to attend college, holding it as a rental, and then completing a 1031 exchange after they have graduated. Many investors are leery of selling a property after making a substantial gain in the market, so opting for a 1031 property exchange would allow them to exchange a residential property for office or business rentals.

At some point the real estate investor will likely find themselves ready to slow down, cash out and possibly retire, and no matter what type of property they own, such as apartment complexes, a rental house, business offices, warehouses or land they can use the IRC 1031 property exchange to find a replacement property. This property may be a nice residential home located at a golf resort or on the beach front where they may choose to retire; in order to qualify as an exchange the property has to be used for investment purposes. In order to fulfill this requirement many investors will use the property as a rental and then later use it as a conversion, meaning that a few years after the original 1031 property exchange, they can simply move into the property without having to pay the normal taxes.

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