In a typical investment property sale, the property owner is taxed on any gain realized from the sale.  However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date or through proper tax planning, eliminated.  Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.

For example:

Exchangor  sells property A in Massachusetts (a 3 family rental).  Exchangor paid $200,000 for property A when it was purchased 9 years ago. Exchangor is selling property A for $500,000.  Ignoring depreciation, Exchangor has a capital gain of $300,000 that he would have to realize and pay capital gains tax on without the section 1031 exchange. The approximate amount of tax Exchangor would pay on the sale is 15% for federal and 5.3% to Massachusetts which is $60,900.  Exchangor buys a ranch in New Mexico for $500,000. Exchangor completes his exchange and pays $0.

By entering into a section 1031 exchange with a Qualified Intermediary, such as All States 1031, he now has $60,900 that he can use to reinvest rather than handing it over Uncle Sam.