Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes if they purchase a like-kind property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate, increase cash flow, diversify into other properties, or consolidate into one property.

There is some confusion regarding what type of property qualifies for a Section 1031 tax deferred exchange. The Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.” “Like-kind” property can include, but is not limited to, any of the following, provided it is held for investment:

• Single family rental
• Duplex
• Apartment
• Commercial property
• Raw land

For example, a single family rental can be exchanged for raw land, or apartments, or a commercial building. In addition, properties can be exchanged anywhere within the United States.

An Exchanger’s primary residence and property held “primarily for resale” are excluded from tax deferral under IRC Section 1031. [Note: Primary residences qualify for tax exclusion, with certain restrictions, under IRC Section 121.]