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A section 1031 exchange has gained popularity since the middle of the 1990’s. It states that a taxpayer can postpone the capital gain tax to sometime in the future. The section 1031 exchange is found in the internal revenue code. The capital gain tax is different from regular income taxes and involves the tax on a sale of a building or any property or investment. The idea for the deferring of this tax comes from the fact that when a sale of a property generates profit and that profit is reinvested, the taxpayer wouldn’t have the money to pay the taxes on the gain from the sale.
A taxpayer who utilizes this method of deferring taxes needs to make special note of the fact that the section 1031 exchange is tax postponed and not tax exempted. When the taxpayer finally makes a sale that generates profit paid to them, they are required to pay the deferred taxes. This deferred tax strategy is provided for in the internal revenue code in order to avoid the situation where a taxpayer has to pay tax on paper gains when no actual cash has been paid to him.
