A 1031 exchange or Like kind exchange is defined by section 1031 of the Internal Revenue Code. This code specifies that if an asset, usually some form of real estate such as land or a building, is sold and the proceeds of the sale are then reinvested in a like kind of an asset then no gain or loss is recognized, allowing the deferment of capital gains taxes.

1031 exchanges provide investors with one of the best tax strategies for preserving the value of an investment portfolio. By using an exchange the investor is able to defer the recognition of capital gain taxes that would otherwise be incurred on the sale of investment property. The investor can then use the entire amount of the equity to purchase substantially more replacement property. To qualify as an exchange the relinquished and replacement properties must be qualified "like-kind" properties and the transaction must be structured as an exchange.

Whether the investor's property is owned free and clear or encumbered, the benefits of a tax deferred exchange are significant. The tax dollars saved by doing an exchange can be utilized to purchase additional investment property. Compare a sale versus an exchange. Assume the following:

- Investor sells property with no debt for $1,000,000
- Basis is $500,000
- The property has been held in excess of 12 months
- Capital gain is $500,000 ($100,000 from recapture of depreciation deductions and $400,000 from appreciation in value)
- Current federal tax rate for an individual is 15% on appreciation and 25% on depreciation recapture (corporations are taxed at a higher rate)
- Investor's state tax rate is 9% (Federal deduction for state taxes is not included).

Result: The investor who exchanges is able to defer the capital gain tax and purchase replacement property worth $433,000 more than investor who sells and reinvests with after-tax dollars.

In addition to deferring the capital gain tax, tax deferred exchanges provide the investor with a wide range of non-tax opportunities to suit the investor's portfolio:

- Reposition assets
- Change property types
- Increase Leverage
- Increase depreciation deduction
- Reduce management obligations
- Provide for estate and retirement planning
- Allow for relocation
- Improve cash flow
- Achieve property consolidation or diversification
- Eliminate or create joint ownership
- Defer phantom gain on problem properties
- Construct improvements on a property

At Parc Bay Real Estate, we work with Reputable Qualified Intermediaries, IPX Investment Property Exchange Services, to help you with all the necessary reciprocal transfer of properties to create the exchange and the "Safe Harbor" protection against actual and constructive receipt of the exchange funds as required by Code 1031. Send us an email at info@parcbay.com to receive more information.

Do advanced planning for the exchange. Talk to your accountant, attorney, broker, lender and Qualified Intermediary	Don't miss your identification and exchange deadlines. Failure to identify within the 45 days identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange. Reputable Qualified Intermediaries will not act on backdated or late identifications.
Do keep in mind these three basic rules to qualify for complete tax deferral: - Use all proceeds from the relinquished property for purchasing the replacement property. -Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. - Receive only "like-kind" replacement property.	Don't plan to sell and invest the proceeds in property you already own. Funds applied toward property already owned purchase "goods and services," not "like-kind" property.
Do attempt to sell before you purchase. Occasionally Exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a reverse exchange (buying before selling) may be necessary. While the IRS has recently provided guidance for reverse exchanges in Revenue Procedure 2000-37, Exchangers should be aware that reverse exchanges are considered a more aggressive exchange variation because some other entity must hold title to either the Exchanger's relinquished or replacement property for up to 180 days pending the completion of the exchange transaction.	Do not dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger's legal relationship with the property may jeopardize the exchange.