1. What is a tax deferred exchange?

Section 1031 of the Internal Revenue Code provides that no gain or loss is recognized if property "held for productive use in a trade or business or for investment" is traded solely for the "like-kind" property that also is to be held for investment or used in a trade or business. The essential element of such a trade is a reciprocal and interdependent transfer of one property for another, as opposed to a simple sale and repurchase. Effectively, I.R.C. Section 1031 exchanges allow investors to "sell" property and reinvest the proceeds in another without having to pay taxes that would otherwise be recognized (owed) on gain from the sale. The payment of such capital gains tax is deferred, representing only a potential tax, which is not owed unless and until the replacement property is sold in a subsequent taxable transaction. The taxes may, in some cases, be avoided all together. One example of this would be if the replacement property passes through an estate and its basis is stepped up to the market value at the time of death.

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