The 1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth. Section 1.1031 of the Internal Revenue Code lays out in detail the procedure for property owners to transfer the financial gain that is realized from the sale of a property into another like kind property without paying the Capital Gains Tax.

The like kind provision for real property is quite broad, and includes Land, Rental and Business property. Any of which can be exchanged for the other. Generally a taxpayer has 45 days from the transfer date of the relinquished property to properly identify the replacement property, and up to 180 days from the transfer date to acquire one or all of the identified properties. The 180 day period can be shortened. The 180 day rule is actually 180 days after the transfer of the relinquished property, or the date of taxpayer's federal tax return (including extensions), whichever event occurs first.

The rule also requires that the "Exchanger" use a safe harbor to hold the proceeds while the exchange is in progress. The only practical safe harbor for most "Exchangers" is a "Qualified Intermediary." A QI provides many helpful functions during a 1031 exchange, including two that are absolutely necessary. First, the QI provides the taxpayer with the required documents to establish the taxpayer's intent to do an exchange. This paperwork creates the structure of an exchange and insures that the end result complies with the laws and rulings. Secondly, the QI acts as the accommodator for proceeds to protect the taxpayer from direct (actual) or indirect (constructive) receipt of the funds, either of which would invalidate the exchange.