1031 Tax Deferred Exchanges
A 1031 tax deferred exchange is a real estate tool approved by the U.S. government provide a tax shelter to real estate investors to encourage them to reinvest in real estate. It is used by real estate owners to postpone payment of the capital gains tax and to reinvest the money in like-kind real estate where it can be used to leverage a new real estate purchase that can continue to generate revenue or asset.
Under a fully qualified Section 1031 exchange, an investor trades real estate for other like-kind real estate and all of the capital gains taxes are deferred until the investor sells the newly acquired real estate in a taxable transaction. The underlying philosophy of deferring capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate.