1031 exchanges involve trading like-kind real estate properties while deferring capital gains and depreciation recapture taxes. In order to qualify for 1031 like kind exchanges investors are required to reinvest 100-percent of equity into real property of equal or greater value.

The IRS requires participants of 1031 exchanges to retain the services of a Qualified Intermediary (QI) to handle all aspects of the tax deferred exchange. QIs are responsible for managing monetary transfers and submission of required legal documents including IRS form 1031.

Real estate investors should engage in due diligence when hiring a Qualified Intermediary. QIs must possess solid experience in the 1031 process. One mathematical error or improperly filed form could lead to colossal fees and penalties imposed by the Internal Revenue Service.

1031 property trades must adhere to two specific time requirements. The first is known as the "Identification Period" and requires investors to identify replacement property in writing within 45 calendar days.

The second time constraint is the "Exchange Period" which begins on the date when property transfers take place and expires within 180 calendar days.

1031 exchange properties are restricted to investment real estate and business equipment. Requirements are broadly defined; allowing investors and investment groups to exchange a wide range of properties. For example, investors can exchange a retail shopping center for an apartment complex or raw land for a commercial warehouse.

1031 like kind property exchanges must be titled in the same name as relinquished properties. If the traded property was titled as Jane Smith Realty Investments, the replacement property must be titled the same. It cannot be titled as Jane Smith Real Estate Investments or JS Properties.

In addition to real estate, equipment used for business purposes can be traded using 1031 tax deferred exchanges. Since 1031 exchange guidelines require investment property be exchanged for like kind property, investors cannot exchange equipment for real estate. 1031 rules require real estate to be traded for real estate and equipment exchanged for equipment.

The IRS prohibits the use of 1031 exchanges for primary residences or vacation homes unless houses are investment real estate and rent is collected on a regular basis. Deferred exchanges cannot be used to trade partnership interest, bonds, stock or inventory.

During the 1031 process investors are prohibited from accessing equity money acquired through the sale of real estate or equipment. Qualified Intermediaries hold all proceeds in a separate account. Once the tax deferred exchange is completed, QIs prepare required documentation linking exchanged properties together.

1031 exchanges allow deferral of capital gains taxes and depreciation recapture as long as funds are used to invest in like-kind properties. Deferring taxes is similar to obtaining an interest-free loan on taxes which would normally be due for a regular real estate or equipment sale.

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