1031 Tax Free Exchanges are an effective way of deferring taxable gain on the sale of real estate.
The general rule is that upon the sale of real property at a gain [where the amount received is in excess of the seller’s cost basis] taxes will be due in the year in which such sale is consummated and the consideration received by the seller.
However, under section 1031 of the Internal Revenue Code, such gain can be deferred by specific adherence to the rules of that section which allow for the tax free exchange of property when “like-kind” property is involved. These rules only apply to property of the same or like-kind.
However, often a seller is not able to find replacement property to his/her liking within the same calendar year.
Therefore, a non-simultaneous exchange is also permitted by the Internal Revenue Code under a sub-section of Section 1031, which has commonly become known as a Starker Transaction. In this transaction, a seller sells his own real property in year one and has eighteen (18) months to find, and close on a replacement property.
This non-simultaneous exchange is also permitted to be accomplished income tax free if the specific rules and regulations related to that transaction are adhered to.