A tax deferred exchange is simply a method by which a property owner trades one property for another without having to pay any federal income taxes on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.
These exchanges are sometimes called "tax free exchanges" because the exchange transaction itself is not taxed.
Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The requirements of Section 1031 and other sections must be carefully met, but when an exchange is done properly, the tax on the transaction may be deferred.In an exchange, a property owner simply disposes of one property and acquires another property, rather than the sale of one property and the purchase of another.
Internal Revenue Code (IRC) Section 1031 is one of the last remaining tax loopholes. It is a powerful tool that allows investors to exchange any investment property for any other investment property. For your exchange to be valid, you must follow specific IRS regulations.
Here is an abbreviated list of the regulations: