To refresh or introduce the concept of like-kind exchanges, they can be explained as follows: normally when a business or investment property (which is considered “like-kind” under the section) that has appreciated in value is sold, a tax is assessed on the gain. Under Section 1031, taxpayers are allowed to “exchange” like-kind real properties for other like-kind properties and rather than paying taxes on the proceeds, they are allowed to defer the recognition of taxable gains until a later recognition event, so long as certain requirements are met.

The basic requirements are:

• Before, or along with, the disposition of the real estate, the taxpayer enters into an exchange agreement with a “qualified intermediary,” which is either a person or company that agrees to hold the funds of the transaction until they can be transferred to the seller of the replacement property.
• Upon closing, the proceeds from the sale are deposited with the qualified intermediary.
• Within 45 days of the date of closing, the taxpayer must identify one or more replacement properties.
• The taxpayer must then purchase one or more of the identified replacement properties within 180 days of the date that the relinquished property is sold. When the replacement property or properties are acquired, the money held by the qualified intermediary is used to purchase the replacement property.

Section 1031 exchanges are not limited to institutional investors. In recent years, there has been a gradual increase of smaller firms and individuals taking advantage of these tax deferrals. There are many robust markets across the country and the gains from selling small apartment buildings, single-family rentals and other business or investment properties are being applied to new acquisitions.