A 1031 exchange is a technique often used by property investors to defer capital gains tax liability on a property's sale. This is accomplished by transferring the rights to a piece of property that one would like to sell to an intermediary, who holds the sale proceeds and uses the money to buy a replacement property that complies with the regulations delineated in Section 1031 of US tax code.

While the current (and growing) interest in the exchange may lead one to believe that Section 1031 only recently came on the scene, this is untrue. As a matter of fact, the history of the 1031 stretches all the way back to 1921, though the original concept was quite different from the 1031 exchange we have come to know and love. The 1031 Exchange really came into its own in the '70s, which saw a host of important changes in the manner in which exchanges were regulated. These changes resulted in a more powerful conception of the exchange process and also generated increased interest from real estate investors.

The 1031 capital gains tax deferral (Section 1031) provides to the investor may, at first glance, appear to be a sort of gift given by the government, however it is, in reality, closer to an interest-free loan, because the investor is expected to repay the funds acquired by way of the tax deferral by accepting capital gains liability upon the eventual sale of a replacement property. Additionally, this interest-free loan is one that may be kept by the investor indefinitely; an investor can choose to conduct any number of 1031 exchanges before ultimately making the decision to make an outright sale, on which the investor must pay capital gains taxes.

The 1031 constitutes a mutually advantageous agreement between the investor and the United States government, profiting the country's economy as a whole as well as the individual investor. By looking upon the transfer of money in an exchange as representing an extension of an existing investment instead of as a separate transaction liable for taxation, investors are given the opportunity to move their funds to the most profitable investments possible. This, in turn, boosts the U.S. economy by bolstering job growth.

As with anything, Section 1031 has skeptics. Some advocates of change in Section 1031 will pose the argument that the untaxed profit gained by to the taxpayer in the exchange process represents an unfair advantage over other buyers. Another frequent issue of concern is that the strict time limits imposed on steps in the exchange procedure could promote an atmosphere of frantic buying, with a resultant increase in asking prices for replacement properties. The aforementioned criticisms, however, are only loosely linked to reality, and the odds that the 1031 exchange will see noteworthy changes in the coming years are quite low. When looking at the big picture, most will concede that the 1031 exchange is immensely helpful to all parties , allowing investors increased profits on the sale of their property while additionally promoting the creation of jobs and therefore the greater good of the country as a whole. Little doubt exists that the 1031 will be a mainstay of the property investment business for years to come.