In real estate and tax law, a tax free exchange is the trade or exchange of one real property for another without recognizing income tax on the gain at the time of the transaction. Instead of paying tax immediately, the gain is deferred under the provisions of Section 1031 of the Internal Revenue Code.
Also known as a 1031 exchange, this arrangement allows investors to reinvest proceeds into like kind property while postponing taxation. The deferred tax becomes due only when the replacement property is sold in a taxable transaction that does not qualify for further deferral.
