What Is a 1031 Exchange?

The name 1031 exchange comes from Section 1031 of the US Internal Revenue Code. A 1031 exchange is a process that allows a property owner to sell their current property and quickly reinvest the income from that sale in a new property of a same or higher value.

The 1031 exchange lets the property owner defer taxes on the profits ("capital gains") earned from the sale of the owner's current property. This benefit allows the seller to use all of the income obtained from the sale of that property for buying a new property rather than only a reduced amount.

The deferred taxes must be paid later, but the 1031 exchange allows the owner to receive more money and reinvest a greater amount into the new property than the owner could without the deferral.