The 1031 Exchange is a rather complex provision of U.S. tax law used almost exclusively by real estate professionals to reduce their tax liability. Under Section 1031 of the Internal Revenue Code, a taxpayer can defer recognition of income tax liability for a portion of a property’s fair market value. A term called a 1031 exchange. A taxpayer can designate the fair market value of real estate property only in a one-time exchange if the property is transferred to a qualifying organization. To qualify for a 1031 exchange, the property must be transferred to an entity that is permanently and exclusively employed in a business related to the trade or business the property is marketed to earn the income or business revenues subject to tax. Also, the property must be transferred between unrelated parties.
The important thing to remember is that if a taxpayer exchanges one type of asset for another, there will usually be capital gains tax implications to be encountered, even if the transaction does not result in a net gain or loss.