Definition

• A Section 1031 Exchange allows you to sell a property and purchase a replacement property without having to pay capital gains tax on the transaction. Because you are just changing one property to another without actually receiving your equity back, it is not considered a gain.
  
  

Types of Exchanges

• Most 1031 exchanges are done as deferred exchanges of real estate. You can also simultaneously exchange real estate, or even do a reverse exchange in which you buy a replacement property before selling your relinquished property. Section 1031 allows for exchanges of personal property, as well.
  
  

The Qualified Intermediary

• If you receive the proceeds of the sale of the property, it is no longer considered an exchange. A qualified intermediary holds the sale proceeds for you, preventing you from ever receiving money, and enabling the exchange to move forward.
  
  

Replacement Properties

• For an exchange to work, you have to buy a replacement property. The Internal Revenue Service requires that you identify what properties you will be buying prior to the closing date. Unfortunately, there are limits on how many properties you can identify.
  
  

Time Frame

• A 1031 exchange also has limited time frames. In a deferred exchange, you have 45 days from the close of the sale of your asset to identify your replacement properties, and an additional 135 days, for a total of 180, to close on the purchase.