1. Section 1031, which allows for “like-kind exchanges,” has been in the tax code since 1921, with the most recent significant modification in 1991. It is a very well-established provision.
2. A 1031 like-kind exchange is not a tax “loophole,” but rather a deferral – the owner pays tax on the property when it is ultimately sold for cash, as opposed to when it is exchanged for another property.
3. Any cash you receive as part of the deal – for example, if the property you receive is valued lower than the one you exchange it for and you receive cash for the difference – is taxed as partial sales proceeds (usually at the capital gains rate).
4. 1031 exchanges are only allowed for investment or business property, but in some cases can be used for properties such as vacation rental homes, and for tenants in common real estate.
5. Timing is important. A “replacement property” must be designated within 45 days of the sale of your property, and you must close the deal on the new property within six months (180 days) of designating it.
National Association of Realtors