About 1031 Exchanges
The opportunity to protect hard earned equity in the 
sale of an investment has been available to consumers since 1921. However, complexities and details of the tax code allowed only the most knowledgeable to use this option. In 1990, the Omnibus Budget Act clarified the process and opened this option to a broader set of consumers.
Section 1031 Exchanges, which have become more popular since the mid-90s, allow investors to defer the tax on capital gains until some point in the future.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.
The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a "paper" gain.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.
Every Section 1031 Exchange transaction is different. These "Frequently Asked Questions" are intended to answer general inquiries. The application of these principles will depend on the specific facts of each transaction. Always consult a competent Qualified Intermediary, attorney, or tax advisor to determine how an exchange may best be structured to accomplish your investment objectives. FOR FAQ CLICK HERE AND VISIT FEA (FEDERAL EXCHANGE OF ACCOMMONDATORS)
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