What is an exchange?

The Internal Revenue Code Section 1031 tax deferred exchange is often called the “Best Kept Secret in Real Estate.” A tax-deferred exchange is the disposition of investment or business property that is followed by an acquisition of another such property without incurring any current tax liability on the first property. Primary personal residences, limited partnership interests, and business goodwill are not eligible for this type of treatment.

The exchanger must exchange into property of equal or higher value and all cash proceeds must be applied to the newly acquired property or they become taxable as gain. Specific and strict rules and regulations must be followed to ensure no tax liability. Exchanges may occur simultaneously or be delayed by as much as 180 days between the disposition and reinvestment legs.