For tax purposes, a 1031 exchange is a real estate transaction involving the sale of one property with the tax on the capital gain deferred because of the qualified purchase of another like-kind property in exchange. For 1031 exchange purposes, the term like-kind property is interpreted as any type of investment property, rather than property owned for personal use. A delayed 1031 exchange, or Starker exchange involves a purchase that closes within 180 days of the sale. A newer variant is the reverse 1031 exchange, in which the sale occurs after the associated purchase. The 1031 exchange rules continue to be refined. Although the 1031 exchange rules are somewhat complex, the effect of breaking them is straight forward. If the IRS determines there was no valid 1031 exchange, sales proceeds may be subject to capital gains tax. The 1031 exchange is a great tax avoidance vehicle for real estate investors. The term 1031 exchange derives from section 1031 of the US Internal Revenue Code of 1986.
