Under Section 1031 of the Internal Revenue Code (26 U.S.C. § 1031), the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due. To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code. The properties exchanged must be "like-kind", i.e. of the same nature or character, even if they differ in grade or quality.

1031 Timing:
  The §1031 exchange begins on the earliest of the following:
     1. the date the deed records, or
     2. the date possession is transferred to the buyer.
  The §1031 exchange ends on the earlier of the following:
     1. 180 days after it begins, or
     2. the date the Exchanger's tax return is due, including extensions, for the taxable year in which the relinquished property is transferred.

The identification period is the first 45 days of the exchange period. The exchange period is a maximum of 180 days. If the Exchanger has multiple relinquished properties, the deadlines begin on the transfer date of the first property. These deadlines may not be extended for any reason.

Multiple Replacement Property Restrictions are imposed on the number of Replacement Properties which can be identified as potential Replacement Properties. More than one potential replacement property can be identified as long as you satisfy one of these rules:
   1. The Three-Property Rule - Any three properties regardless of their market values.
   2. The 95% Rule - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified.
   3. The 200% Rule - Any number of properties as long as the aggregate fair market value of the replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the exchanged properties as of the initial transfer date.

If you are selling real property that will result in a net gain, you may want to consider a 1031 Exchange to defer the tax consequences associated with that gain.

• To defer paying capital gains taxes
• For leverage - By deferring payment of taxes, you are effectively using the government’s money to advance your investment
• To upgrade property or increase your equity basis
• To diversify and own multiple properties
• Relocation to a new area to take advantage of differences in regional growth or income potential
• To change property types among residential, commercial or retail

You will have to pay your capital gains taxes. By identifying property with DIS, you can reduce your potential tax risk and avoid a failed closing.