Kennitz Health

Under Section 1031 of the U.S. Internal Revenue Code, investors are allowed to defer capital gains taxes on the exchange of like-kind properties.  Like-kind means of the same nature or character, even if they differ in grade or quality.  Typically, a property owner has to pay a certain percentage of gain from any sales transaction as tax.  But with 1031 exchanges, the owner may choose to defer this tax gain until some future date.  

The logic behind this is that the property owner reinvests the gain from the sale into another property.  Hence, he or she does not generate any funds yet to pay for the tax. However, when the other replacement property is eventually sold, the original deferred gain, plus any additional gain since the purchase of the replacement property, then becomes subject to tax.

This law is intended to promote the continued investment in real estate and other assets, so that the economy continues to grow and improve. For an individual or business, it also allows the best way to build up wealth over time.