Section 1031 of the Internal Revenue Code provides that no gain or loss will be recognized on the exchange of any type of property held by a taxpayer for business use or investment. Sometimes referred to as "like-kind" exchanges, 1031 Exchanges do not require an actual trade or swap, in the context of a barter between two property owners. Instead, under the Internal Revenue Code they are typical sales and purchases that involve the same exact elements as any other sale or purchase, but without the payment of capital gains taxes. The only real affect is that the investor increases his or her selling and buying power by avoiding the drain of capital gains taxes by following the IRS-approved procedures under Section 1031 regulations. No other aspects of the transaction are affected.

Who Should Consider a 1031 Exchange?

If you are thinking about selling property held for a business use or investment, you should consider a 1031 Exchange. An Exchange offers you the opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and keep your money working for you, not the IRS. You work too hard to simply just pay 20% or more of your profit as capital gains tax without carefully considering the reinvestment option you have under the IRS Code. Essentially, a 1031 Exchange is an interest free loan from the IRS. Even better, it is a loan that can be used to increase your amount of principal through subsequent exchanges and then never be repaid, if you plan properly.

The Properties involved in the Exchange:

RELINQUISHED PROPERTY: The relinquished property is the business use or investment property you own and want to sell in your 1031 Exchange.

REPLACEMENT PROPERTY: The replacement property is the business use or investment property you want to acquire to complete the 1031 Exchange.

There can be more than one of each of the relinquished and replacement properties. For example, an Exchanger can sell three small properties and purchase one large property or sell one large property and acquire four smaller ones. You do not have to purchase the same type of property. For example, you can sell a storage facility and acquire an apartment building or sell a raw piece of land and buy two or three rent-houses

The Parties Involved in the Exchange:

THE EXCHANGER is you, the taxpayer who is electing to defer the payment of capital gains tax by using a 1031 Exchange.

THE SELLER is the person who owns the property you wish to acquire as a replacement property.

THE BUYER is the person who wants to purchase the property you, the Exchanger, are selling.

THE INTERMEDIARY: To successfully complete a Section 1031 Exchange the IRS regulations require the use of a Qualified Intermediary. Asset Exchange of Oklahoma, LLC is a Qualified Intermediary under the IRS Code. The role of the Intermediary is to act as a middleman in both the sale and purchase transactions.

To defer all of the capital gains, an investor must acquire property of equal or greater in value to the property sold, and must reinvest all equity from the property sold. Receiving cash, or trading down in value, is treated as boot and taxed as capital gain.