If I told you I knew how you could get an interest free loan that you didn’t have to pay back until you were ready, would you be interested? Who wouldn’t!? Essentially, this is what you get when you use an Internal Revenue Code Section 1031 Tax Deferred Exchange (IRC § 1031) to your advantage. When you sell real property that you hold for investment purposes and replace it with other real property provided both properties are either held for investment of used in a trade or business.
With a combined rate for both Federal and California State tax of approximately 25% and the potential of it being more if you have to consider recapture of depreciation, the motivation to use an exchange to defer capital gains is clear. If the Capital Gain on a property being sold is $100,000, the tax may be in excess of $25,000.
By using an exchange, an investor (exchanger) can sell his property, defer the capital gain tax and leverage the entire equity to acquire replacement property. In order to complete a successful exchange and fully defer capital gains, the exchanger must comply with certain requirements and strict time lines that are outlined in the code.
For example, the exchanger has 45 days from the day escrow closes on the relinquished property, to identify in writing potential replacement properties. After the 45th day, the exchanger cannot change the properties identified and the Exchanger has 180 days from the close of escrow of the relinquished property to close escrow on one or more of the identified replacement properties.
To fully defer capital gains, the exchanger must acquire replacement property that is equal to or greater than the net value of the relinquished property. Likewise, he must fully reinvest all the net equity and replace the existing loan with either a new loan on the replacement property or add cash equal to or greater than the debt existing on the relinquished property when purchasing the replacement property.
It is always advisable to consult with your legal or tax advisor when considering an exchange. Used correctly, the IRC § 1031 Tax Deferred Exchange can help an investor build wealth and save taxes.
Guest Writer 
Toni Esposti, CES®/CSEO/CEI is the Vice President for OREXCO 1031 Exchange (Old Republic Exchange Company), a Qualified Intermediary company specializing in IRC § 1031 exchanges in the North Bay. For more detailed information call Toni at 888.677.1031.
[...] are significant taxable consequences even if the owner walks away with no cash. While an IRC §1031 Tax Deferred Exchange can, in theory, be utilized under these circumstances to defer the capital gain tax consequences, [...]