A 1031 Exchange is one of the few strategies available to defer the recognition of capital gain and depreciation recapture taxes on the sale of qualifying property. The 1031 Exchange allows you to sell and subsequently acquire properties in order to reallocate, consolidate or diversify your investment portfolio without paying tax on any capital gain or depreciation recapture taxes.
Typically, by selling your investment property, you will trigger federal and state capital gain and depreciation recapture taxes, which will leave you with less equity to reinvest. This makes it difficult to trade-up in real estate value and/or increase your cash flow when you have to recognize and pay these tax liabilities. By completing a 1031 exchange, you can defer your capital gain and depreciation recapture tax liabilities and therefore keep 100% of your net proceeds from the sale of your investment properties available to reinvest in other like-kind replacement properties.