If you own investment real estate, then you’ve probably heard of the 1031 exchange. For those who are unfamiliar with the line in the tax code, here’s a simple explanation: The 1031 exchange allows you to sell your investment property and use the proceeds, gains and all, to purchase another property or “like-kind” asset without paying any capital gains tax. It's rare to have a line in the tax code that allows you not to pay taxes, which makes the topic so interesting.
Some real estate investors believe that in order for the 1031 exchange to work, deferring all capital gains tax, the like-kind replacement property must be identical to the investment property sold. For example, if you’re selling farmland, some believe you can 1031 exchange the proceeds only if the replacement property is also farmland. Others believe that to qualify for a 1031 exchange, you must be the owner of the property being sold and the replacement property being acquired. Neither of these is a 1031 exchange restriction.
