A tax deferred 1031 exchange has been part of our tax code since 1921, yet it remains a mystery to most home owners. A deferred exchange is a simple method by which a property owner may trade one property for another without paying income taxes on the transaction. Not only real estate may be traded but also personal property such as race horses, boats or fine art, etc. The key element in a 1031 is the property must be exchanged for another property prior to the sale. If you sell your house and proceed to buy a new one you can not do a 1031 exchange, you must plan a head. There are four (4) parties involved in a typical exchange:

1. The taxpayer has property and would like to exchange it for new property.
2. The seller owns the property that the taxpayer wants to acquire in the exchange.
3. The buyer has the necessary money and wants to acquire the taxpayer’s property.
4. The qualified intermediary (usually a lawyer) technically buys the property and resells it to the taxpayer for a fixed fee.

The typical exchange is not a swap where by two individuals swap properties with one another. There will be tax consequences for everyone involved in the exchange. However, only the taxpayer will receive the benefits of IRC 1031. The exchange allows the taxpayer to dispose of property and not incurs any immediate tax liability. Their tax dollars can keep working for them in another investment. More over, the loan is forgiven upon the death of the taxpayer, which means their estate never has to repay the loan.