The 1031 exchange of the 1986 Internal Revenue Code provides investors a great opportunity to build wealth and save on taxes. The exchange allows investors to sell their investment property and use the proceeds on a replacement property to defer paying a capital gains tax. Capital gains tax is currently 15-20% depending on your income.
So instead of using proceeds to pay taxes, you can purchase a new and potentially different type of property. You can sell a residential property and use it to purchase land, a rental, or even commercial real estate. It also works the other way around. Now eventually, if you sell the new property and decide not to reinvest the profits you will have to pay the deferred taxes.
However, many investors just keep rolling it into another like kind property. Another thing to consider is this is a time sensitive exchange. Currently, the exchange is only good for properties reinvested with in six months. If you are interested in a doing a 1031, please consult with a qualified CPA or tax accountant.