Anyone thinking about getting a 1031 exchange should spend some time learning about the rules and regulations.  With a 1031 exchange you can save a lot of money when it comes to paying capital gains taxes.  This is especially true for those interested in buying and selling business related property.  Using a 1031 exchange is a great way to increase the profitability of your business transaction.

The term 1031 exchange comes from the section of the United States tax code which establishes it.  This provision says that you can defer payment of capital gains taxes if the property involved in the exchange is used for either investment or business purposes.  This means that you will not be able to use a 1031 exchange when you are buying or selling residential properties, unless they are a long term investment.  Make sure that the property you are considering selling or purchasing meets the requirements for a 1031 exchange before entering into the transaction.

When there is an exchange between two properties which have the same purpose or are “like kind” properties you do not need to recognize the loss or gain incurred.  When the exchange occurs between two properties which are not “like kind” the gain from that exchanged must be recognized.  The loss is usually not recognized in these instances. 

When using a 1031 exchange it is important that you remember that you can only use the money you gained from selling a property to buy another property which will be used for business or investment purposes.  Another important regulation for using a 1031 exchange is that you use an authorized intermediary.  This intermediary will be the one to handle all the financial aspects of the transaction.  When hiring an authorized intermediary it is important that you choose someone with a solid reputation for getting the job done right.