A 1031 exchange gets its name from the US Internal Revenue Code, section 1031. A taxpayer may defer capital gains and related federal income tax liability when an investor exchanges certain property types. There are several stipulations with a 1031 exchange. For example, an investor needs to identify a replacement property (or properties) within 45 days AND there is a maximum exchange period of 180 days in which you need to close on the property
Using a 1031 exchange, an investor is able to defer taxes, leaving more money in the pocket of an investor. An investor must buy a bigger property since they do not have to pay taxes. Many savvy investors use the 1031 exchange multiple times to buy bigger and bigger properties than they could if the 1031 exchange did not exist.
Using a 1031 exchange can greatly improve an investor's returns over time, allowing them to buy bigger investment properties. Remember, using a 1031 exchange does not eliminate taxes, but defers taxes. Please talk to a CPA, lawyer, or financial advisor for more information as this is not legal, financial, or tax advice.