Since 1921, under Section 1031 of the Internal Revenue Code, investment or business property owners, through the use of a Qualified Intermediary, can sell one property and purchase another property or multiple properties without incurring an income tax liability.  The property owner’s cash flow is improved by postponing the tax obligation and interest is earned on the sale proceeds until the new purchase is made.

While a 1031 Like-Kind Exchange can clearly be of great benefit to an owner of real estate, it does have fairly strict rules as to what types of transactions qualify and how they must be executed.  Some of the more important rules include:

• The property exchanged must be held for business or investment purposes.  The sale of personal residences does not qualify.

• Exchanged properties can be any investment or business real estate.  Commercial real estate can be exchanged for vacant land or residential property, as long as it isn’t immediately used as a personal residence.  Likewise, residential real estate can be exchanged for a commercial building or vacant property. 

You can exchange a single property for multiple properties, or purchase one property from the proceeds of several.  Proceeds not used to purchase new investment property are taxed.