Definition of "Tax free exchange"

Zoan Hernandez real estate agent

Written by

Zoan Hernandezelite badge icon

LoKation Real Estate

Transfer of real estate from one taxpayer to another that are exempt from federal income taxes. An example is an exchange of property in which ownership of transferred real estate is still kept. In the year of exchange, there is no recognized gain or loss. However, there is an adjustment to basis of the property received in the transfer, in effect deferring the gain upon future disposition.


Need help as a:

I'm interested to:


I work in:

Reach out to the local professionals for help
I agree to receive FREE real estate advice.

Agents, get listed in your area. Sign up Now!

Here's what you'll get:

1. Full zipcodes coverage for the city of your choice for 3 months

2. The ability to reach a wider audience

3. No annual contract and no hidden fees

4. Live customer support/No robo calls

$75 - Any City - 3 Months Coverage
loader gif

Please wait ...

I agree to receive FREE real estate advice
I agree with Terms & Conditions and Section 5-5.9.

1031 Tax Free Exchange

Also called a like-kind exchange. An exchange in which tax benefits are available to real estate owners planning to sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate.

Real Estate held for these purposes are called like-kind/1031 properties. Property owners may sell like-kind properties and defer taxes on the sale's profits by meeting the requirements of Internal Revenue Code (IRC) 1031 exchange. The purpose of the 1031 exchange is to allow sellers of like-kind property to buy replacement property of like-kind within a specific time period and defer taxes. The deferred profit tax benefit applies despite a time lapse between the sale of the taxpayer's former property and his purchase of replacement property. This sell-now, buy-later situation is called a delayed exchange.

The 1031 exchange applies only to property other than the personal residence or dealer property. Specifically included for exchange are properties used or held for rental income, business purposes, investment, or as vacation homes. Taxwise, investment properties include vacant land held for profit, ground leases and management-free triple net lease. An owner of these qualifying like-kind properties can complete a 1031 exchange, but he must follow the to time constraints.

A 1031 exchange differs from the more informal 1034 tax deferred rollover, which applies to a personal residence and has more lenient deadlines. Unlike a 1034 rollover, a 1031 exchange has different deadlines and other criteria. The replacement property must be acquired before 45-day and 180-day deadlines have run. Note that often, brokers are unable to arrange a nearly simultaneous closing for both legs of an exchange.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.


Popular Real Estate Terms

Reward for investing. The real estate investor must compare the anticipated return for an investment with the associated risk. The return includes: Appreciation (or depreciation) in ...

Changing property ownership. An example is the sale of a home to another. ...

General decrease in prices. It is the opposite of inflation and different from disinflation, which is a decrease in the rate of price increases. Deflation results form a reduction in the ...

A notice, usually in writing, in which notice of termination is given by one individual or business to another. It is pursuant to a cancellation provision in a contract to forestall ...

Ownership of a real estate in which at least two or more individuals have equal ownership. If a member of the group dies, the property is transferred to the survivor (s), for example, a ...

Looking for an amortization definition? Amortization is an accounting term that basically means something like “reducing the gap between what is owed”. Here’s the play by ...

Demolition and removal of all existing structures on a building site and the subsequent construction of a totally new building structure. For example, in a downtown redevelopment project, ...

Third party to a bankruptcy proceeding. The trustee's responsibility is to value and recapitalize the real estate firm if it is to be reorganized. ...

The term effective interest rate is the actual return from a savings account or any investment where you pay interest when considering the effects of compounding costs over time. Through an ...

Popular Real Estate Questions