Long utilized by savvy real estate investors, 1031 exchanges are evolving as an important tool for main stream real estate consumers. 1031 exchanges are allowed under Section 1031 of the Internal Revenue Code of the United States. The code permits investors to defer capital gain taxes on the exchange of like-kind properties. You should always consult a qualified attorney or tax advisor to determine if or how an 1031 exchange should be used.

-A like-kind exchange is a tax-deferred not a tax-free investment.

-Like-kind is defined as real property also known as real estate. Qualifying properties are outlined in the 1031 code.Some excluded types are; property held primarily for sale, inventories, stocks, bonds or notes, securities, interests in a partnership, and certificates of trusts. Personal residences do not qualify.

-Properties must be used with a proper purpose. Both the relinquished property and the replacement property must be held for use in a trade, business or as an investment.

-The relinquished property must be exchanged and not sold for cash.

-The majority of 1031 exchanges are facilitated by Qualifying Intermediaries that assist the taxpayer in meting the IRS requirements of Section 1031.

-The value of the replacement property must be equal to or greater than the value of the relinquished property. -The equity in the replacement property must be equal to or greater than the equity in the relinquished property.

-The debt on the replacement property must be equal to or greater than the debt on the relinquished property.

-All of the net proceeds from the sale of the relinquished property must be used to acquire the replacement property.

-A 1031 exchange ends the moment the taxpayer has control of the proceeds from a relinquished property.

-A Qualified Internediary is considered a safe harbor by the IRS. The safe harbor holds all proceeds from relinquished properties until they are needed for the replacement property. The safe harbor or QI guarantees that the funds will not go into the hands of the taxpayer.

-Title is held in 1031 exchanges by the taxpayers and not the Qualified Intermediary. The taxpayer does though assign her or his interests in the property purchase and sale contracts to the QI.

-There are strict timelines for replacement of a relinquished property. A taxpayer must identify within 45 days of the date a property was relinquished potential replacement properties. Exchanges must be completed within 180 days after the transfer of the relinquished property or the due date taxpayer's federal tax return for the year in which the relinquished property was transferred, which ever comes first. Extensions are granted in some cases, consult an QI for more detail.

This is an overview of the 1031 exchange. There are many additional definitions and sections to the code. You are urged to consult with an Qualified Intermediary and an attorney to gain the required information to determine if a 1031 Exchange is right for you.