Was reading a chapter in my real estate class and came across this...
IRS Section 1031 Exchange
An interesting point about the Section 1031 Exchange is that it is often called the "tax-free" exchange. In fact, in and of itself, it is not "tax-free," but it is certainly a way to "tax defer" payments until a later time, perhaps until the seller is in a lower tax bracket.
Basically, the 1031 Exchange allows an owner of an investment property to exchange it for another property of "like-kind." The "like-kind" is a very loose definition only requiring that the property must be used for investment purposes. In other words, you cannot exchange a gas station for a diamond tiara. You also cannot exchange a rental property for a new personal residence. The equity in the properties must be balanced. Interestingly, a $300,000 property might be exchanged for a $150,000 property if the equity position is the same in both: the $300,000 property has an outstanding mortgage of $200,000 leaving $100,000 in equity. The $150,000 property has an outstanding mortgage of $50,000 leaving an equity position of $100,000. If the equities are not balanced, there will be additional compensation required, which is referred to as
"boot." The government will charge taxes on any monies or other compensation received as "boot."
Probably where that term came from.
