• A Section 1031 exchange allows a taxpayer to delay a tax payment.TAX TIME image by brelsbil from Fotolia.com
  
  A Section 1031 exchange allows a taxpayer to defer federal income taxes on financial gain from the sale or trade of property in order to acquire a new property for business or investment purposes. The 1031 exchange does not mean the taxpayer will never pay tax, as when the replacement property is eventually sold, gains tax will apply. Section 1031 of the Internal Revenue Code contains the regulations for 1031 exchanges.
  
  

What Are the Different Types?

• The most common 1031 exchange is a delayed exchange, when time elapses between the transfer of the real estate being relinquished and the receipt of the replacement property. A simultaneous exchange is when there is no time gap, and a build-to-suit exchange involves the taxpayer's using proceeds from the original property to improve the new property. Personal property exchanges are used for items other than real estate, and a reverse exchange occurs when the taxpayer receives ownership of the new property before relinquishing the old property.
  
  

What Are the Requirements for an Exchange?

• The property must qualify under Internal Revenue Service regulations for the exchange. Both the relinquished and replacement properties must be used in the taxpayer's line of work, business or for investment purposes. The replacement property must be "like-kind," but most real estate qualifies as long as the property is located in the United States. The relinquished property must be traded for other property, so a taxpayer who sells the original property and using the proceeds to buy the new property cannot use the 1031 exchange if the money was in his possession before obtaining the new property.
  
  

What Are the Rules for Total Gain Deferment?

• A taxpayer is permitted to defer all the taxes on the gain if the following conditions are met: the exchange of the replacement property has an equal or greater value than the property being relinquished, the equity and debt in the replacement property is equal to or greater than the equity in the relinquished property and all the money generated from the sale goes toward acquiring the new property.
  
  

What Does a Qualified Intermediary Do?

• A qualified intermediary (QI) is a person not involved in the transfer of the property the taxpayer is allowed to use to meet 1031 exchange requirements. A written agreement regarding the sale is executed between the QI and the taxpayer. The QI receives the funds when the property is sold so the money does not enter the taxpayer's hands. The QI then delivers the funds to the closing agent when the sale for the replacement property is being finalized.
  
  

When Must the Exchange be Completed?

• The taxpayer has 45 days after the relinquished property is transferred to find a replacement property. The replacement property must be obtained within 180 days of the old property transfer or by the date the taxpayer's federal tax return is due, whichever arrives first. The taxpayer is allowed to file for a tax extension in order to get a full 180 days.
  
  

What Property Does Not Qualify?

• The taxpayer's personal residence does not qualify for a 1031 exchange. Real estate held primarily for the purpose of selling, inventory, stock, bonds, notes, certificates of trust and interest in a partnership cannot be used in a 1031 exchange.