Capital gains taxes are deferred if all of the exchange funds are used to purchase like-kind investment property. The deferment is like getting an interest-free loan on the tax dollars you would have owed for a cash sale. More equity is retained, and that helps you move into properties of higher value each time you perform a 1031 exchange.

A 1031 exchange cannot be used for the sale of a personal residence. It must be real estate that has been held for investment purposes. The properties must also be like-kind.

What does a like-kind property mean? For a real estate exchange, this means real property for real property, but not necessarily land for land or a rental house for another rental house. Take a look at the IRS rules for specific information about what types of properties qualify as like-kind. You can exchange a single property for multiple properties, or purchase one property from the proceeds of several.

According to the IRS: "In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business."

To begin, it is imperative that you follow the 1031 Exchange rules outlined by the IRS exactly. Some important guidelines to follow are listed below:

Identify the Alternate Property for your 1031 Exchange
If you have not already done so, identify replacement property. You have 45 days from closing on the relinquished real estate, the property you are selling, to identify up to three replacements. Your list must be sent to the intermediary in writing. The IRS is not flexible on this time period.

Pay Attention to the Real Estate Contract Wording
Your contract to buy or acquire the property must contain language that shows an intent to perform a 1031 exchange. A real estate attorney or your qualified intermediary can help you with the wording. According to the IRS, "A qualified intermediary is a person who enters into a written exchange agreement with you to acquire and transfer the property you give up and to acquire the replacement property and transfer it to you. This agreement must expressly limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary."

You (or your agent) should send the intermediary a copy of all the real estate documentation including the sales contract and any other information they require.

Closing Dates Are Critical
The closing date for the new property must take place within 180 days of the closing on the relinquished property.

Keep In Touch with All the Parties Involved
You or your agent should stay in contact with the intermediary, keeping them advised regarding closing dates. They will be responsible for most of the paperwork associated with the exchange, and may have specific lead-time or other requirements for each step of the process.

A Partial 1031 Exchange
If you plan to use only part of your proceeds for a 1031 exchange, consult with the intermediary to make sure your sales contract is worded correctly. You also should talk with an accountant to find out how the cash sale will impact your taxes.

Find and Research Your 1031 Exchange Intermediaries
Be sure to compare the services, costs, and references of several qualified intermediaries before selecting one to handle your 1031 exchange. The work they do is essential to the success of the exchange—make sure it is a trustworthy and experienced company or individual.
Ask as many questions as necessary to make you feel comfortable with the process. A tax deferred exchange is not difficult to do, but there are specific steps you must follow to make sure every aspect of the sale and purchase complies with US tax laws.