A 1031 exchange makes it possible for investors to sell and buy similar types of property while deferring tax consequences*. This type of transaction is authorized by section 1031 of the IRS code and offers investors a reliable strategy for the protection of their real estate assets. A successful 1031 exchange allows the investor to reinvest 100% of the equity from the sale of a property into the purchase of a preferred replacement property without recognizing any gain (and therefore avoiding a large capital gains tax).
This type of property sale and investment can either be done through a simultaneous or delayed 1031 exchange. In most cases a 1031 exchange is conducted as a three-party delayed exchange also known as a Starker Exchange in which an intermediary ensures a reciprocal transfer of the properties and provides a safe harbor against the actual receipt of exchange funds.
*Although this is generally true, consult your tax advisor for details pertaining to your specific situation. These statements should not be relied upon as a substitute for advice from a certified tax accountant, legal or business advisor.