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If an investor or property owner wants to utilize a Section 1031 in order to exchange one of their properties for a "like kind" property, then they need to follow the rules and regulations outlined in the 1031 exchange. This will allow the investor to defer payment of any state and federal capital gains taxes, as well as give them the opportunity to utilize all of the proceeds from the sale of the property. This is also beneficial because it can increase cash flow, helps them to diversify into other properties, consolidates many properties into one in order to avoid multiple management problems, or can enable the investor to purchase a more valuable piece of property.

One major point to understand is what qualifies as a 1031 like kind property. The IRS states that in order to qualify, an investor shall incur no loss or gain on the exchange. A few examples of properties that can be exchanged include duplexes, single family residences, commercial properties, apartments and even raw land. For instance, you can exchange an apartment rental for a single family home rental, commercial building, etc.

When you utilize the Section 1031 it will allow you up to 180 days in which to complete your exchange. However, the 1031 exchange rules do state that you must identify your potential replacement property within 45 days of selling your old property.

It is also possible to sell a property under the 1031 exchange property code that has been used for both residential and business purposes. The major requirement is that a clear distinction must be present in the records of the taxpayer, with regard to the property that has been used for business versus the portion that is for personal use. One example of this that would be allowed under the 1031 exchange real estate rules is a bed and breakfast, and using the property as part personal residence and part business property. The same principal applies for the taxpayer who deducts a portion of his or her residence for a home office, as it is considered business usage.

Section 1031 can also be an effective strategy when selling a primary residence that contains excess land around a personal residence, and is used as an investment property. For example, take an owner who has a personal residence that is situated on 25 acres of land, yet it has been determined that the usual and customary acreage for similar properties in the vicinity are on an average only 3 acres in size. If the taxpayer has been holding the 22 excess acreage for investment, then under 1031 exchange rules the excess acres can be exchanged.

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Tags: 1031 exchange real estate, 1031 exchange rules, 1031 property, irs 1031 exchange, real estate 1031, reverse exchange, section 1031 exchange