What Is 1031 Exchange?
The IRS website states that a 1031 Exchange "provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange." That is why it is also known as a Staker Exchange and Like-Kind Exchange.
There are four types of 1031 Exchange: Construction/Improvement, Delayed, Reverse and Simultaneous Exchange.
Construction/Improvement Exchange is useful when purchasing a property that is worth less the one you sold. It allows you to use the remaining balance towards improvements on the property.
Delayed Exchange is a type of exchange in which you must have a new property in mind after the sale of your property. This new property has to be identified within 180 days. This is the most common type of exchange.
Reverse 1031 Exchange is a great option if you have the cash for it. It basically allows you to buy the replacement before selling or relinquishing the original property. So you would momentarily be on the title to both properties. This is why most banks won't lend the money.
Simultaneous Exchange is exactly what it sounds. You can close on your replacement property at the same time you close on the sale of your original property.
Of course, like with everything else, there are exceptions. 1031 Exchange does not apply to bonds, Certificates of Trust, debt, partnership interests or stocks. Remember, any gains from 1031 exchange is tax-deferred, not tax free.