What is a Tax-deferred exchange? 
The sale of your investment property is much different than taxation on a personal residence.  A 1031 exchange allows an investor to exchange property and to defer federal capital gains taxes from the transaction (which can be as much as 28%).  A 1031 exchange preserves equity and allows the re-invested tax amount to be treated like a interest-free, no-term loan.  1031 exchanges are an excellent way to build wealth.

What are the benefits of a tax-deferred exchange?
The deferment of Federal Capital Gains taxes on sales of investment properties and the ability to build wealth quickly are the main benefits to exchanges.  The ability to leverage money that you would normally pay in taxes, the ability to exchange into income-producing properties, the ability to diversify your real estate investments, the ability to consolidate properties, and the ability to divest yourself from co-ownership properties are also benefits of exchanges. 

What qualifies as an exchange?
An exchange can be a simple swapping of two properties, or it can be very complex.  Due to 'Safe Harbor' requirements the use of a qualified intermediary is mandatory.

What requirements apply to an exchange?
The properties that are exchanged must be 'Like-Kind' and cannot be expressly excluded by statute. Both the property relinquished and the property acquired must meet the Qualified Use requirement (business use or investment property).   The properties must be exchanged, and not sold.  There are time requirements (see delayed exchange below), and there may be holding-time requirements.  

What types of exchanges are available?
A Simultaneous Exchange occurs when both properties record on the same day.  A Delayed Exchange occurs when a replacement property is identified within 45 days and acquired within 180 days of the sale of the relinquished property.  A Reverse Exchange occurs when the replacement property is acquired before the relinquished property is sold.  A Multi-Property Exchange occurs when one property is relinquished and multiple Replacement Properties are acquired, or when multiple properties are relinquished and one Replacement Property is acquired.  A Multiple-Party Exchange occurs when multiple investors relinquish a single property and each purchases their own Replacement Property.  An Improvement (Construction) Exchange occurs when the Intermediary acquires and retains ownership of the Replacement Property while the improvements are taking place.  After the improvements are complete, the exchange is completed.

What is the difference between a sale and an exchange?
Assume that you are selling a property for $250,000 that cost you $150,000 a few years ago.  You have a loan of $100,000 against the property.  If you sell the property, you will subject to capital gains taxes on the $100,000 gain - or about $28,000 in taxes.  After the sale and paying taxes, you will have $122,000 available for re-investment.  If you put 25% down on your next property, you could afford a $448,000 investment.  If you were to exchange the property, you would have $150,000 available for re-investment.  You could then afford a $600,000 property while putting 25% down. 

Where can I find more information?
You should find a qualified intermediary to help you with 1031 exchanges.  Feel free to drop me an email and I will give you several referrals to firms qualified to handle your 1031 exchange.