What Is a 1031 Exchange?

A 1031 exchange refers to a method of deferring taxes on the sale of an interest in real property allowed under section 1031 of the internal revenue code. It allows the 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.

For example, if you buy a building for $600,000 and you sell it for $1,000,000, you have a $400,000 tax gain. If you are not prepared to pay capital gains on that gain you can invest that $1,000,000 into a new property and defer the tax gain until it is more beneficial for you.

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