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Section 1031 of the IRC provides that no gain or loss is recognized if property "held for productive use in a trade or business or for investment" is traded solely for other "like-kind" property which also is to be held for investment or used in a trade or business. The essence of such a trade is a reciprocal and interdependent transfer of one property for another, as opposed to a simple sale and repurchase.
Effectively, 1031 is the Internal Revenue Code Section 1031 on exchanges allowing investors to sell property and reinvest the proceeds in another property without having to pay taxes that would otherwise be owed on recognized capital gains from a sale. The payment of such capital gains tax is deferred, representing only a potential tax which is not owed unless and until the replacement property is sold in a subsequent taxable transaction. The taxes may, in some cases, be avoided all together, for example if the replacement property passes through an estate and its basis is stepped up to the market value at the time of death.
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