Delayed Exchange

There are many reasons to perform a delayed exchange of real estate held for investment or income producing. Since 1921, the IRS has encouraged business and investment property owners to "trade" their real estate and defer paying the capital gains tax on any profit. This delay, under Section 1031 of the IRC code, only applies to business and investment property and real estate. There are different rules for personal residences and vacation homes.

A delayed exchange is a good idea when you want to give up property that is hard to sell in exchange for more marketable property. It's also good when you want to obtain property that has a better potential for profit. You might also want to trade properties when you are having management problems and want to find property that is easier to manage.

Why Delayed Exchange?

Continuous reinvestment is the idea behind delayed exchanges. The government encourages such trading, by allowing you to defer the capital gains taxes. In one sense, it's like getting an interest free loan from the government--you simply reinvest your profits into property of equal or greater value. This also works for equipment, aircraft, and other big-ticket items, but the rules for personal property are more complicated than those for real estate.

If you are an investor, you could also do a 1031 exchange to eliminate your need for new financing on the replacement property, or to consolidate your equity, tax-deferred, without paying capital gains tax. "Like kind" does not mean "same kind," so you can exchange one property for several, and vice-versa. You must go through a qualified intermediary so you never touch the money. This person cannot be your accountant, lawyer, relative, or agent.