Generally, when you sell real estate, you have to pay tax on the gain from the sale of your property. This gain is caused either by the property appreciating over time or by taking depreciation deductions for tax purposes. Section 1031 of the Internal Revenue Code allows you to defer paying that tax.
A 1031 Exchange is not a tax loophole. It is a code section written by Congress specifically to allow anyone who meets its requirements to sell their property and defer paying tax on the gain. For example: The Investor (exchangor) must have a like kind investment property to do the exchange. i.e., Investment rental property for another investment rental property or Investment vacant lot for investment rental property, etc.
The exchangor should purchase a property for a higher basis than the selling property to get the best results. The exchangor as purchaser can leverage their investment by financing and receiving cash at settlement and gaining additional tax incentives.
The exchangor also needs to select an attorney experienced with completing the exchange documents that are needed. The cost of this service ranges from approximately $700 to $1,000.
(Please note: The information on this page is not intended as advise on legal or tax matters.)