I’ve written about the 1031 exchange — also known as a Starker exchange — in the past (here’s a link to menu of my 1031 offerings) and it’s a great tax-deferred way get out of an investment property you are no longer interested in owning.
Here’s my intro from the first link:
The Internal Revenue Code 1031 exchange, also known as a Starker exchange, is a powerful tool investment second home owners can use to sell their existing real estate and purchase new property with all capital gains taxes deferred as long a certain criteria are met. A 1031 exchange is considered a “like kind” exchange of property. This exchange can be tricky and should be conducted through the services of a Qualified Intermediary, also referred to as an Exchange Accommodator. This independent party helps accommodate both the sale and subsequent purchase transactions.Before pursuing a 1031 exchange remember this option is only available for investment property. If you’re not sure if your second home is considered investment real estate, check where it falls in the four tax categories for second homes. If you use your second home for no more than 14 days in a year, or 10% of the days rented if that number is greater, the IRS will consider your second home investment real estate.
And here’s a link to a recent article at Forbes.com. The article provides a nice overview of whys and hows of a 1031 exchange, plus the comments provide additional insight into the process.
From the above link:
Because of the concentrated nature of a real estate investment, it is important for portfolio managers to have the flexibility to rebalance their portfolios and make tactical bets in either different property sectors or investment regions. A 1031 exchange encourages such rebalancing by allowing investors to move in and out of real estate exposures through the exchange of one property for another without the burden of immediately incurring capital gains taxes. By continually using 1031 exchanges when acquiring and unloading property, investors can defer the capital gains tax until it is time to liquidate some or all of the portfolio, there is a favorable change in the tax law, or they have accrued enough capital losses to offset the capital gains obligation.
David Kirkpatrick 