A 1031 exchange makes it possible for investors to sell and buy investment property while deferring tax consequences. This transaction is authorized by section 1031 of the IRS code and offers investors the ability to reinvest 100% of the equity from the sale of an investment property into the purchase of a replacement property without recognizing any gain. Primary residences do not qualify for a 1031 exchange.
1031 exchanges are not difficult, however there are a series of steps that must be followed or the IRS may disallow and the sale may be subject to capital gains. When selling an investment property, all of the equity from the sale must be transferred to a 'qualified intermediary or facilitator (the taxpaper can't receive any cash from the sale). The bigger challenge is in the timing of the sale and purchase. The IRS allows only 45 days after the sale to identify a replacement property and up to 180 days to close on that purchase.
For more details, visit Section 1031 Legal Information Institute.