1031: You Can't Have Something for Nothing

Ever wish you can just, literally, swap your property with another one from somewhere? Section 1031 of the Internal Revenue Code allows you to do just that, as long as the property that you want is for investment or production purposes only. The new property only has to be somewhat similar to the old one that you have, although the word “similar” is very subjective and adds difficulty to the transaction.

This is why most real estate exchanges are facilitated by reliable exchange companies that can help you find a brand-new property and swap it with another one of your own. They make sure that the property you've swapped with doesn't saddle with you any unlawful gains or losses and that you're only required to pay little or no tax during exchange. However, 1031 requires that any property being swapped needs to be properly identified and exchanged within 180 days after the transaction was made, or else the Internal Revenue Service (IRS) won't recognize the transaction.

Businesspeople can use 1031 to change the form of their investment without getting any attention from the IRS. Real estate investors can also use the 1031 to, say, sell off a single-family home in exchange for a condominium or apartment unit, or a hotel for an office building. This is known as exchanging like-kind real estate and has been practiced by investors for at least 30 years now.