Investor's Loan Guide by Graham W. Parham

Understanding a 1031 Tax Exchange
A 1031 exchange, otherwise
known as a tax deferred exchange is a
simple strategy and method for selling
one income property, that is qualified,
and then taking those funds and
applying them to the acquisition of
another property (also qualified) within
a specific time frame. The logistics and
process of selling a property and then
buying another property are
practically identical to any
standardized sale and buying
situation. A "1031 exchange" is unique
because the entire transaction is
treated as an exchange and not just
as a simple sale. The difference
between "exchanging" and simply
buying and selling is in the end. Using an exchange allows the taxpayer(s) to
qualify for deferred capital gains. So in simple terms, sales are taxable with the
IRS, but not if you use 1031 exchange.
Due to the fact that exchanging a property represents an IRS-recognized
approach to the deferral of capital gain taxes, it is very important for you to
understand the components involved in such a tax-deferred transaction. It is
within the Section 1031 (IRS. US CODE: Title 26, §1031) of the Internal Revenue
Code that you can find the appropriate tax code necessary for a successful
exchange.
Why Do a 1031 Tax Exchange?
Any Real Estate property owner or investor of real estate should consider
an exchange when he/she expects to acquire a replacement "like kind"
property subsequent to the sale of the existing investment property. Anything
otherwise would necessitate the payment of a capital gain tax which is
currently 15% but may go to 20% in future years. Also, include the federal and
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