A tax-free exchange of one investment/business real property for another is provided for by Section 1031 of the Internal Revenue Code. Simply stated, Section 1031 allows a property owner to sell the real property and reinvest the proceeds by purchasing "like-kind" real property. This transaction, when conducted properly, enables the property owner to defer capital gain taxes. The is the primary advantage of a tax-free exchange: the taxpayer may dispose of real property without incurring any immediate tax liability.
People often fail to consider a tax-free exchange as an investment strategy because they are misinformed about the legal requirements. Here are some of the common misconceptions: