What is a “1031 exchange”?
A “1031 exchange” refers to a method of deferring tax on the sale of an interest in real property allowed under section 1031 of the Internal Revenue Code. In brief, it allows a seller to defer tax on a gain that would otherwise be realized on a sale of property if the proceeds from the sale are reinvested in like-kind property. There are explicit rules governing timing and transfer, and several different formulae for qualifying purchase property. If you are planning on using Section 1031 as a tax planning tool in your sale, be sure to discuss your alternatives thoroughly with a qualified attorney or accountant prior to entering into the purchase agreement. The purchase agreement must contain specific language and the exchange must be conducted precisely in order to qualify for deferred tax treatment.