what is a 1031 exchangeIn the summer of 1990, the Internal Revenue Service (IRS) issued the deferred exchange regulation under Section 1031. This set of regulations is more commonly known as the 1031 Real Estate Exchange. The set of rules were long-awaited. It specified in clear terms how the capital gains arising from particular real estate transactions would be taxed.

Starker 1031 Exchange or simply, the Starker Exchange is another name to describe these transactions. It is so because it was the Starker Case in which the U.S. District Court of Oregon first approved a non-simultaneous real estate exchange.

So what is this 1031 Exchange?

A 1031 Exchange is an exchange of one real estate for another, where you don't have to pay any capital gains tax. In other words, if you sell a real estate and purchase another with the proceeds of this sale, you will be spared from paying any capital gains tax.

The only condition is that such an exchange must take place as per the guidelines laid down in Section 1031 of the Internal Revenue Code (IRC). All properties can be sold and purchased in the open market.

The guidelines that are to be followed are very simple. According to the rules; firstly, the property must be of a like-kind. This, however, takes in a broad connotation as far as real estate is concerned. And, secondly, you must employ a qualified intermediary for the property transference.

Any land, business property and rental property can be a part of a 1031 Exchange, which means that any of these can be exchanged for the other. There is a twist, however. The properties involved must be both qualifying, as well as like-kind.