What is a 1031 Exchange?

1031 exchanges are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes. Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include bare land, rental property, commercial buildings and homes other than your primary residence. A 1031 exchange can defer the capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes can be costly. Internal Revenue Code Section 1031 can benefit you in several other ways. By deferring taxes, you have increased flexibility, leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.