1031 exchange is a way of delaying tax payments for a real estate property.

It works in business deals which are like barter trade. If you have a piece of land, you can exchange it with someone who has an apartment building which is worth the same amount as the land.

This way you still get new property but without the taxes because no major profit has been made.

An exchange like this is also called a like-kind exchange because you exchange similar properties which are worth a similar amount of money. It is used when you want to invest in a new property but you do not want to sell what you already own, and also to postpone paying taxes for the exchange.

There are five kinds of 1031 exchanges which can be used by an investor. The first one is the simultaneous exchange, which means the exchange is done at the same time- you give out your land and get your apartment building on the same day. The second type is the delayed exchange, where you are allowed a fixed number of days to make the exchange.

This type of exchange is most common and it works because it gives an allowance to prepare the properties and paper work for the exchange.

The third kind of exchange is the improvement exchange, and this allows the people doing the exchange to improve or repair the properties after exchanging.

The fourth one is the reverse exchange, which is also called a parking arrangement. It is where you can get your property after giving yours up, but since this is very risky, there are strict rules about doing this kind of exchange. The last one is the personal property exchange, which means you can exchange a home or other personal property for another one of the same value.

Remember that for a like-kind exchange, you are only postponing paying the taxes on the property. If you want to sell the property you gained from the exchange, you are required to pay taxes for the new deal and also for any profits got since the exchange. So a 1031 exchange is a good way of investing in real estate property easily because the tax issues can be sorted out much later.

Winston Rowe and Associates prepared this article, they are a national consulting firm specializing in commercial real estate financing. They can be contacted at https://www.winstonrowe.com