Tax-Deferred Exchange IRC Section 1031

If conditions for the tax-deferred exchange are met, then the gain from the sale of property relinquished will not be recognized, indefinitely deferring the payment of capital gains and recapture of depreciation taxes.

IRC Section 1031 - No gain or loss shall be recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of like-kind.

Property eligible - Both the property relinquished and the replacement property must be held by the exchanger for productive use in a trade/business or for investment purposes.  Like-kind property exchanges are required.  Any real property is considered like-kind to any other real property.

"Buy to Hold" Exchanges - Section 1031 allows tax-deferral only for "buy to hold" Business exchanges, not "buy to sell" Dealer transactions.  A non-qualifying Dealer is regularly involved in the development, improvement, and advertising of property for sale.  The real estate operations of a Dealer rise to the level such that his property investments appear more like inventory acquired for sale instead of long-term investments held for income.

Qualified Intermediary Safe Harbor - The QI receives the proceeds from the relinquished property sale then makes the purchase of exchange property on behalf of the taxpayer.  Use of a Qualified Intermediary protects the exchange with a Safe Harbor, a legal presumption of no actual or constructive receipt of exchange proceeds by the taxpayer.