The basic definition of a 1031 real estate exchange is the sale of existing investment real estate property and the replacement of that property with new investment real estate. Certain rules must be followed during 1031 exchanges. The exchange of property must take place within designated time frames, and the transaction must be structured so that the seller does not take actual or constructive receipt of the sale proceeds. By following IRS regulations and structuring the sale and acquisition of property as a 1031 exchange, an investor can defer payment of capital gains taxes that would normally be due.

According to the IRS, the properties involved in the exchange must either be held for investment or for "productive use in a trade or business." Most investment property in the US can be exchanged for other investment property, but personal residences may not be exchanged.

Once the existing property is sold, a replacement property must be identified in writing within 45 days. The actual acquisition of a replacement property must be completed within a maximum of 180 days from the sale of the existing property. The IRS also requires that the exchange be of like-kind, but that does not preclude an investor from exchanging one type of property for another. For example, an investor may exchange a single-family rental property for a multi-family rental property.

It is important to understand the different types of property eligible for exchange and the different types of exchanges. For additional information and to define these terms, go to Section 1031 of the Internal Revenue Code.

The application of Section 1031 to a particular transaction of property can only be determined after careful study of a taxpayer's particular facts and circumstances, and analysis by his or her tax advisor, attorney, real estate agent, and intermediary.