What is a 1031 exchange?

A 1031 exchange, also known as a like-kind exchange, is a tax-deferment strategy that allows investors to defer paying capital gains taxes on the sale of an investment property when the proceeds are reinvested in another similar property. This strategy is governed by Section 1031 of the Internal Revenue Code.

By utilizing a 1031 exchange, investors can maintain their investment capital and grow their real estate portfolio without being immediately taxed on the gains from the sale of their original property. The properties exchanged must be of like-kind, meaning they are similar in nature or character, which typically refers to real estate properties.

This method not only provides a way to defer taxes but also encourages reinvestment and can be a significant tool for wealth accumulation in real estate. The other choices do not accurately capture the essence of a 1031 exchange, as they pertain to unrelated processes in real estate transactions.