The 1031 exchange is a technique commonly used by property investors to indefinitely defer capital gains tax liability on the sale of a property. This is achieved by relinquishing rights to a piece of property that one would like to sell to a qualified intermediary, who then holds on to the sale proceeds and uses them to acquire a replacement that complies with the regulations set out in Section 1031 of US tax code.

Though the current (and growing) interest in the 1031 may lead you to believe that it only recently came on the scene, this is untrue. As a matter of fact, the 1031's history stretches all the way back to 1921, though the original concept was quite a bit different from the exchange investors have come to know and love. Section 1031 really came into its own in the seventies, which saw a host of important changes in the way in which exchanges were regulated. These changes paved the way to a more powerful conception of the exchange process and created increased interest among investors.

The indefinite capital gains deferral a 1031 exchange grants to the investor might, at first, appear to be a sort of gift from the government, however it is, in reality, closer to an interest free loan, because there is an expectation that the investor will “repay” the extra money gained from the deferral by accepting capital gains liability upon the eventual sale of a replacement property. Additionally, this “interest-free loan” may be kept for an indefinite period of time; an investor may choose to conduct any number of exchanges before finally making the decision to make an outright sale, on which the investor must pay taxes.

The 1031 exists as a mutually beneficial arrangement between the investor and the U.S. government, profiting the country's economy in addition to the individual investor. In looking upon the transfer of value in an exchange as representing a continuation of a preexisting investment instead of as a separate transaction liable to be taxed, taxpayers gain the opportunity to transfer their money to the most profitable investments possible, which, in turn, helps to elevate the economy by encouraging the growth of new jobs.

As with anything, the 1031 exchange has its detractors. Some advocates of change in Section 1031 will pose the argument that the tax free income gained by to the investor in a 1031 exchange represents an unfair advantage. Another frequent concern is that the stringency of the time limits imposed on steps in the exchange process may promote a frenetic rate of buying, resulting in an increase in the cost of replacement properties. The aforementioned complaints, however, are only loosely linked to reality, and the odds that Section 1031 will see any noteworthy changes in the foreseeable future are low. When looking at the big picture, most will concede that the 1031 exchange is greatly advantageous to all involved, allowing taxpayers increased profits on the sale of their property while also promoting job growth and therefore the greater good of the U.S. as a whole. There is no reason to doubt that the 1031 exchange is destined to be a part of the investment business for years to come.