How Does A Like-Kind Exchange Work?

If, rather than sell a property outright, you "trade" it - directly through a third party - for similar property with no money changing hands, you may qualify to defer recognizing the gain on the disposition of the first property.

This is a "like kind" exchange, also referred to as a "Starker" exchange or a "(Section) 1031 Exchange" under the tax laws. There are significant restrictions involved, and professional guidance from an attorney or tax professional is recommended. You can also get information on the process by reading IRS Publication 544.

Some general information which may be of interest:

Real estate can usually be traded for any other real estate, regardless of the use. EXCEPTION: Property used by you as a residence cannot be used.
It is not practical to use this strategy to defer paying tax on appreciated stocks or bonds, as the rules would require you to trade for essentially the SAME stocks and bonds.

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